Is Life Insurance Really Worth It? How to Know If You Need Coverage

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Life insurance can be worth it if you have dependents or shared financial obligations. It offers critical financial support for those left behind, but the decision ultimately depends on your individual needs.

When Life Insurance Is Worth It

If you’re considering a life insurance purchase, some potential reasons to move forward include:

• Financially protect your beneficiaries. If you die, your family might be left without an income or a reduced income. This could derail your family’s financial plans. Purchasing life insurance gives you some peace of mind, knowing that your family will receive a financial windfall to help get them back on their feet after your loss.
• Pay for your funeral expenses. Funerals can get expensive quickly. If you don’t want your family to struggle with funeral expenses, a life insurance policy can provide the necessary funds.
• Pay off the debt you leave behind. If you die with debt, your spouse might be on the hook for repayment. A life insurance policy with a large enough death benefit can help your loved ones pay off debt after you are gone.
• Cover estate taxes. If your family stands to inherit significant assets, leaving them a life insurance benefit can help them cover the taxes on that estate.
• Leave a financial legacy. For some, a life insurance policy offers a way to leave an inheritance for their heirs.

How To Evaluate the Cost of Life Insurance

It’s clear there are many reasons to purchase life insurance. But it’s important to weigh your reasons for purchasing life insurance against the cost of the policy. Here’s how to evaluate the cost of life insurance:

1. Decide What Type of Coverage You Need

Start by taking a look at the different types of coverage, including term life and permanent life.

Generally, term life insurance is a more affordable option designed to cover a set period of your life. While permanent life insurance tends to be more expensive, it offers coverage for your entire life.

2. Determine How Much Coverage You Want

After you’ve decided on the right option between whole vs. term insurance, you’ll need to decide how much coverage you want.

For those seeking term coverage, add up your long-term financial obligations, including mortgage payments and college costs, then subtract your available assets. The gap represents how much life insurance coverage you’ll need.

3. Shop Around for Coverage

Every insurer determines your premiums slightly differently. Take time to compare quotes for coverage across multiple insurance companies to find the best deal available.

4. Compare to Your Budget

With some quotes in hand, you can decide if the cost of life insurance will fit into your budget. Remember, a term life insurance policy tends to be a more affordable option.

5. Weigh the Cost Against the Potential Benefits.

Of course, no one wants to consider their death. But if you passed away, consider if a life insurance policy would impact your family’s financial future.

If your family couldn’t survive without your income for the short term, then the cost of coverage might be worth it. That’s especially true when you consider the average cost for a policy is often less than $40 per month.

Common Myths About Life Insurance

Several persistent myths about life insurance can lead to misunderstandings. Here are a few to consider.

Myth: Isn’t Life Insurance Just for Older People?

Although it’s tempting to put off your life insurance purchase until later in life, it’s often a good idea for younger people to purchase life insurance.

For young people, life insurance tends to be more affordable. If you lock in lower rates when you are young, you’ll have affordable coverage going forward.

Myth: Isn’t Life Insurance Really Expensive?

Many assume the cost of life insurance is too high to fit into their budget. But it’s worth checking if cheaper policies, like term life insurance, are within your budget.

Myth: Is Life Insurance Only for Parents?

It’s true that parents have dependents that rely on them. But even if you don’t have children, you may have others who rely on you financially. For example, if you have a spouse who relies on your income, life insurance might be a good idea.

A large amount of shared debt is another reason to consider life insurance. For example, if you have a large mortgage balance or a co-signer for your other loans, buying life insurance protects the financial future of your co-signer.

Myth: Is My Employer’s Health Insurance Enough?

Although employer-sponsored life insurance is a good place to start, it’s not always enough coverage for your situation.

For example, the coverage might only provide one or two times your annual salary, which might not be enough financial protection for your dependents. Read the fine print before completely relying on an employer-sponsored life insurance policy.

When Life Insurance Makes Sense — And When It Doesn’t

Purchasing life insurance generally makes sense for the following situations:

• Breadwinners. If you are a breadwinner for your family, it typically makes sense to purchase enough life insurance to insulate your family’s finances from the potential loss of your income.
• Stay-at-home parents. Although they might not earn a traditional salary, stay-at-home parents provide plenty of services that would need to be replaced. For example, cooking, cleaning and child car costs can add up. A life insurance policy can help a surviving spouse cover the cost of these services after an unexpected death.
• People with dependents. If you help support someone, like a college student or someone with a disability, a life insurance policy can protect their financial interests after you are gone.
• People with shared debt. If you share a debt or someone has co-signed on your loan, getting a life insurance policy to pay off those debts protects their financial future.

Of course, life insurance doesn’t make sense for everyone. Here’s when to consider skipping life insurance:

• Unpartnered people with no financial dependents. If you don’t have a partner, children, or parents who depend on you financially, life insurance might not be necessary
• People with extensive savings and minimal debt. If you’ve eliminated debts and build assets for your family to inherit, they might not need a life insurance check to help them survive after your death. For example, if your spouse’s retirement is fully funded, you don’t have a mortgage, and your kids are out of school.

Your financial situation may change as you go through different seasons of life. Reevaluate your decision to skip life insurance during every major life event, like a marriage or birth.

Takeaway

Life insurance offers financial peace of mind to those you might leave behind.

If you aren’t sure whether or not life insurance is the right option for you, consider working with a financial advisor to sort through the details of your unique situation.

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