Do I Need Life Insurance? How To Know If It’s Right for You

shapecharge / iStock/Getty Images

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

You may think life insurance is only for people with families and mortgages, but that’s not the case. After all, life can take unexpected turns leaving you or your loved ones financially vulnerable. No matter if you’re single, married with kids or a business owner, life insurance can offer financial peace of mind.

What Is Life Insurance?

Life insurance is designed to provide financial support to your loved ones in the case of your death.

• When you sign up for life insurance, you enter a contract with the insurer.
• The insurer agrees to pay your designated beneficiaries a lump sum upon your death. 
• In exchange, you pay a premium on a set schedule.

Do I Need Life Insurance?

Not everyone needs life insurance. Here’s a breakdown of when you may or may not need it.

You may need life insurance if:

• You have dependents who rely on your income.
• You are responsible for a mortgage or co-signed debt.
• You own a business.
• You have high amounts of debt and not enough savings to cover it.

You might not need life insurance if:

• You’re single with no dependents or debt.
• You have enough savings or assets to cover whatever is needed.

What Life Insurance Covers

Life insurance pays your beneficiary a lump sum upon your death.

A primary beneficiary is typically your spouse, child, family member or friend. However, it also may be a trust, charity, business or an estate.

Your insurance may also ask you to name a backup beneficiary in the event that your primary beneficiary is deceased at the time of your death.

Here are some ways the funds can be used.

Income Replacement

If you’re married and your current lifestyle requires two incomes, life insurance can provide temporary income replacement for your family while they sort things out.

Funeral Expenses

The national median cost of a funeral with viewing and burial is $7,848. Life insurance could potentially cover those costs with money left over.

Business Expenses

If you own a business, life insurance proceeds could help temporarily cover associated expenses, including operating costs and payroll.

Estate Taxes

If you leave many assets to your beneficiary, they will likely have to pay estate taxes.

Inheritance

Life insurance doesn’t have to be used in a specific way. If the money isn’t needed to cover your funeral, debt, business or estate expenses, it can serve as an inheritance for your beneficiary.

Charitable Gifts

Suppose you have all your other expenses covered and don’t wish to designate someone as your beneficiary. In that case, you can pick a charity to receive the funds upon your death.

How Much Life Insurance Do You Need?

According to Daniel Ray, a life insurance specialist and founder of PinnacleQuote, a good rule of thumb for determining how much life insurance coverage you need is to calculate 10 to 15 times your annual income. 

“For example, if you earn $50,000 a year, you might consider a policy between $500,000 and $750,000. This ensures your family has enough to cover both immediate expenses and future needs. Overall, understanding your unique situation and planning ahead will lead to the best decision.”

4 Types of Life Insurance Explained

Life insurance is not one-size-fits-all. Some policies can be partially utilized by the policyholder while still living. Consider these different options to meet your needs.

Term

Term life insurance provides temporary coverage with no cash value or investment options. It’s affordable, temporary coverage that will pay your beneficiary if you die within the term.

• Offers coverage for a set number of years, such as 10, 20 or 30.
• Premiums required during the term.
• Pays your beneficiary upon your death or the policy expires with no benefit due at the end of the term if you’re still living.

Whole 

Unlike term life insurance, whole life insurance is considered permanent coverage. It builds cash value with no investment options.

• Policy remains in effect as long as premiums are paid.
• Portion of premiums builds tax-deferred, guaranteed cash value over time, which policyholder can borrow.
• Death benefit portion of policy is paid to beneficiaries as a tax-free lump sum; cash value portion is generally kept by the insurer.

Universal

Like whole life insurance, universal life insurance is also considered permanent coverage. It builds cash value and offers limited investment options.

• Builds tax-deferred cash value and a variable cash value growth rate over time instead of the guaranteed growth rate that whole life offers.
• Allows policyholders to invest in stocks, bonds and other investments, which may provide a greater return.
• Offers flexibility — policyholders can adjust the amount of their premiums and the death benefit as long as the policy’s cash value is enough to cover the cost of the insurance.
• Ability to borrow or withdraw funds from the policy’s cash value.
• Generally does not pay the cash value portion of the policy to the beneficiary; the amount reverts back to the insurer.

Variable

Variable life insurance coverage is also considered permanent. It builds cash value and has investment options, but it carries a higher risk than a universal life policy.

• Provides both a death and cash value benefit that grows tax-deferred.
• Allows for paying more than the required premium to build cash value.
• Allows the policyholder to invest not only in stocks and bonds but also in various sub-accounts, such as mutual funds, which could provide for greater growth over time.
• Cash value benefit is variable, which means more risk.
• Provides access to loans or withdrawals from the policy.
• Possibility of passing on the policy’s cash value to your beneficiary.

Types of Life Insurance: At a Glance

Here’s a side-by-side look at the different types of life insurance:

Factors To Consider Before Buying

Ray said that when choosing life insurance, it’s important to look at a few key factors.

“Above all, consider your financial responsibilities — things like mortgages, education costs and any outstanding debts. You’ll also want to think about your family’s future needs and your overall financial situation. In fact, your age, health and lifestyle will play a big role in the type of coverage and premium you can get.”

Common Misconceptions About Life Insurance

Ray said that a common misconception about life insurance is that it’s only for older people or those with families. “The truth is, life insurance can benefit anyone, and the younger and healthier you are, the lower your premiums,” he explained.

Another misconception, according to Ray is that employer-provided life insurance is enough. He said that, in many cases, it’s not enough to cover what your family might need.

5 Life Insurance Alternatives

Various alternatives to life insurance exist, including the following options:

• Guaranteed coverage plan:
  • No medical exam or records are required; death benefit is usually capped at $25,000.
• Mortgage protection insurance:
  • Pays off your remaining mortgage balance if you pass away or become disabled.
• Pre-paid funeral plan:
  • Covers part or all of your funeral expenses and offers monthly installments for plans ranging from $10,000 to $25,000.
• Asset-based long-term care insurance:
  • Hybrid insurance that combines LTC insurance with a fixed or variable annuity; upon death, remaining funds can be passed on to beneficiaries.
• Self-funded savings:
  • Instead of paying life insurance premiums, you contribute the amounts to a savings account. Another option is to reallocate your investment portfolio to generate more interest, which will be available to your beneficiary upon your death. 

Is Life Insurance Worth It to You?

When deciding whether or not you need life insurance, it’s important to consider whether you need it for your family’s financial security or to cover expenses you don’t already have a plan for. If all those expenses are handled, you might want life insurance to provide a charitable gift or inheritance or as a cash asset.

In any of these instances, life insurance can be valuable to have. Before opting in, consider talking to a licensed advisor to compare options and costs based on your situation.

Share This Article: