Do You Need Life Insurance & Is It Worth It?

We are well acquainted with doing annoying things for our kids. 

Driving to swim meets? Check. Using vacation time on random teacher’s workdays? Check. Oh, and that time our first grader had to bring in 100 of something—guess how capable a 6-year-old is of collecting 100 pennies or 100 lollipops without parental involvement?

But we do it because we love them, and they’re our responsibility.

Enter a parental chore you’ve probably heard a lot about: life insurance. You might ask yourself, "Do I need life insurance?" or "How do I know if I need life insurance?"

It depends, but the more responsibilities in your life, the stronger chance that a policy could be right for you. (For example, here are some ways to stay on top of your finances at each stage of life.)

What Is Life Insurance?

Life insurance is an agreement between you and an insurance company that says that, if you were to pass away, the insurer would pay a "death benefit" to beneficiaries of your choosing. In many cases, people designate their spouse or children as beneficiaries. That way, if something were to happen to them, they'd know that their loved ones would have money to make ends meet.

Is Life Insurance Worth It?

Is life insurance really necessary? While a lot of people can benefit from having a life insurance policy, not everyone needs one. Some major life and financial milestones, like raising a family or saving for retirement, can guide your decision about what kind of protection you might need. (Here’s what parents should know about life insurance.)

Who needs life insurance the least? The following types of folks may have the least need for life insurance, though this will vary depending on personal details:

1. People without children or financial dependents

2. People who already have significant retirement savings that a spouse could rely upon in their absence

3. People without a mortgage

4. People without significant debts

Here's more on how that breaks down.

Do You Need Life Insurance?

Who needs life insurance? When is life insurance necessary? Well, that depends on a number of factors.

Do you have kids or other financial dependents?

In thinking about who needs life insurance, children play a big role. When you have a baby, you sign on for at least 18 years of kid-related bills. Sorry to break it to you, but diapers and daycare bills with an infant are only the beginning.

“Life doesn’t get cheaper!” says Rose Price, Certified Financial Planner and partner at VLP Financial Advisors. Everyday costs like clothes, extracurricular fees and (of course) college can add up to some serious cash. Life insurance can help ensure that your family will make ends meet even if you or your spouse passes away.

Don’t have kids yet? If you’re planning on babies in the future, it might be worth considering getting life insurance now, since it tends to be cheaper the younger and healthier you are. 

On the other hand, if a dog, cat or houseplant is all the “baby” you want, you may have less need for life insurance. 

You should still consider life insurance if you’re child free but your partner stays at home, however, or if you have other family or friends who depend on you financially. But if the only one who depends on your income is you, it might be less important to make a plan to replace your financial contribution.

Does your spouse or partner depend on your income?

If there's a significant income gap between you and your partner, or if one of you is a stay-at-home parent without an income stream, then life insurance may be worth considering.

Ask yourself whether your partner would be able to maintain the same standard of living without your income. Would they need to move to a different house or apartment? Would they need to get a job in a very quick hurry in order to make ends meet? If so, life insurance might be a way to provide a cushion to reduce the stress on your spouse.

Do you have a mortgage or other debts?

Besides kids, debt is the main financial factor to take into account when you’re thinking about if life insurance is worthwhile. Owning a home (and paying off a mortgage) is one of the biggest sources of debt for most people. Unlike some student loans, mortgage debt won’t disappear if you die (cosigned loans won’t go away, either, so keep that in mind when you’re adding up debt).

If you and your spouse share debt, you should have a plan so neither one of you gets stuck with too much to handle alone should the worst case happen. (Here are six kinds of debts you might leave behind even after you pass away.)

By contrast, renters without major debts will likely have an easier time making a go of it without life insurance, even if that involves scaling down to a more affordable place.

Do you expect your heirs to face estate taxes?

If your family will need to pay estate tax, a life insurance policy could help offset those costs. Of course, this is irrelevant unless you have a very large estate. In 2021, you don't have to worry about federal estate tax until your assets exceed $11.7 million.

Would your funeral be a big financial burden?

If you think your surviving family members would struggle to cover the cost of your final expenses, then life insurance could help fill that gap. Standard funerals can easily cost $7,000 or $8,000.

Do you own a business that would fail without you?

If you have co-founders of your business or employees whom you want to watch out for in your absence, you might consider a life insurance policy to provide them with a buffer if something were to happen to you.

Are you keen on avoiding probate?

Probate is the process through which courts decide that your will is legally valid and oversees its execution. This can take months or possibly even years in some cases, so if you want to make sure your family receives some financial assistance ASAP, life insurance could be one option. That's because life insurance generally doesn't go through probate, so the funds will likely be available sooner than assets that do go through the process.

Do you have robust savings?

Various rules of thumb say you need at least $1 million to retire comfortably, or 10 to 12 times your annual income. Life insurance can be a way to protect your family’s long-term financial future if they can’t count on your 401(k). 

If something happened to either you or your partner, the surviving spouse may face financial struggles in retirement, on top of the loss of not growing old together. This isn’t to say that you should buy a life insurance policy instead of saving for retirement! Your best plan is to save in retirement accounts like 401(k)s or IRAs throughout your working life.

But if your or your spouse’s early death might cut those retirement savings short, a term life insurance payout can help replace what you’d planned to save over the course of your career. (Here's what to do if you receive a life insurance payout.)

If you’re financially self-sufficient, your life insurance needs are less about a contingency plan for retirement and other expenses. 

One important exception is people with estates worth more than $11.58 million. You’re subject to estate tax when you own that much. If your assets aren’t easy to convert into cash (like a ranch or other property your family wouldn’t want to sell), a life insurance benefit can cover estate tax obligations and save your family from the headache and heartache of selling property they wouldn’t want to part with.

It’s worth noting that life insurance benefits generally aren’t taxable.

How to Use Life Insurance

Most of the time, people turn to life insurance to help provide financial security for their loved ones. If you pass away, the death benefit can pay for things your income would have covered. 

Life insurance tends to fall into two large categories: term and whole life insurance. Term life insurance tends to be great as an income replacement if someone were to pass away. As indicated by the name, term life policies have a set period (or term). If the insured person were to pass away during this period, the life insurance policy pays the beneficiary.

On the other hand, a whole life policy doesn't have a set time frame. As such, regardless of when someone passes their policy would be active (assuming all requirements have been met such as paying the whole life insurance premium).

Premiums for term life insurance are lower than most other forms of life insurance. You can choose a term that aligns with other goals, like paying off your mortgage, so you’re not paying for coverage many years after you no longer need it.

You might also use life insurance as a way to fund your own funeral. Here's more on how you can use your life insurance benefit.

Life insurance also sometimes makes sense as a wealth management tool—particularly whole life insurance. Whole life insurance policies tend to be more expensive than term life. That’s because in addition to providing permanent coverage (so long as premium payments are up to date), these policies build cash value over time. This is why whole life is also called permanent life. (There are also a few types of whole life policies).

So, regardless of when you pass, with whole life insurance a death benefit will be paid so long as the policy is in-force, and the cash value can provide a source of funds while you’re alive in the form of loans or withdrawals. Sometimes the cash value can be used to make premium payments as well. 

Keep in mind that using any cash value for a loan or withdrawal can reduce any available death benefit, and can also cause the whole life policy to lapse if you’re using the cash value to make premium payments. You might want to speak with a financial planner or an insurance agent who sells various forms of life insurance in order to help you decide if a permanent life insurance policy is a smart move for you.

Life Insurance Without a Steady Paycheck

Your family may depend on you financially even if you’re not a traditional “breadwinner” in a 9-to-5 role. It’s usually best to insure both you and your partner, even if only one of you works outside the home. (Here’s what you should know about life insurance if you’re a stay-at-home parent.)

One parent may plan to stay home for a few years after a baby but know what job (and rough salary) to expect when they return to the workforce. Other times, one partner may have been out of the workforce long enough that they aren’t sure what it would look like to job-hunt again.

“If you have a spouse who has no income and hasn’t worked in a while, the coverage on the working spouse goes up because you don’t know what the non-working spouse’s income would be,” Price says. 

Life insurance coverage on the employed spouse needs to account for the possibility that the non-employed spouse might have to restart a career from a low-paying stage. So, instead of computing coverage for a non-working or stay-at-home spouse based on salaries, you might calculate instead how much it would cost to replace the vital tasks they do at home, like childcare or other services a single parent might need.

Freelance or seasonal workers also may not know what their income looks like in a typical month or year. “When you have clients who have irregular income, they tend to know certain months that are higher,” Price says. Insurance providers can work with semi-annual or annual income estimates, rather than looking for predictable monthly figures.

Ultimately, it makes sense for many families to choose a coverage amount based on their needs, like bills and debts, rather than tying coverage to a strict multiplication of a salary.

Is Age a Big Factor in Who Needs Life Insurance?

At the end of the day, your life insurance needs will likely be dictated by what's best for your family. Nonetheless, age does play a significant role in determining how much a life insurance policy might cost for you. As a general rule, life insurance gets more expensive as you age.

Nonetheless, some types of policies tend to be more affordable, such as term life insurance. In many cases, your greatest period of need will be determined by your family situation. For example, if you have young children and want to make sure they're provided for until they hit college age, then you might choose a term length to cover your family for that time. Presumably, if you're above a certain age, there's also a good chance that your financial obligations might be reduced, as well.

Do I Need Life Insurance if I Don't Have Dependents?

Just because you don't have kids or other clear financial dependents like aging parents, that doesn't mean that no one is affected by your finances. Here are a few reasons life insurance may make sense even if you aren't a parent or caregiver:

• Covering final medical expenses: If you're nervous that you could become ill at the end of your life and incur large medical bills not covered by health insurance, then a life insurance policy could help defray those costs after your death.

• Paying for funeral costs: Similarly, if your family would struggle to pay for your funeral and other expenses, life insurance could help make them less of a burden.

• Take the heat off co-signers: If someone has co-signed debt with you, such as a parent co-signing on your student loans, then that person will still be on the hook for the debt after you're gone. That's true of a co-signed mortgage and other loans, too. Life insurance could help pay off those balances.

When to Consider Getting Life Insurance

We've spoken to too many people who think, "I'm young and not likely to die anytime soon! Why would I get life insurance right now?" Just because you're less likely to face your mortality in the near future doesn't mean you're invincible. And insurance companies price in the fact that you're less at risk of passing away; that's why premiums are generally cheaper for those who are young and healthy.

Do I Need Life Insurance on My Children?

In many cases, it may not make financial sense to take out a life insurance policy on your children. That's because their risk of dying is extremely low, and you don't rely on them financially. That said, some people consider doing so if they would struggle to fund a funeral, or if they would need to take a long bereavement leave from work and lack the savings to fund an extended unemployment.

Should I Get Life Insurance as an Investment?

Although some people do describe whole life insurance as an investment, we've found that life insurance tends to hit its forte when used to help protect our loved ones, rather than as a traditional investment vehicle. It's true that whole life is sometimes touted as another way to fund retirement. That's because those policies help you accrue capital over time by gaining interest.

Some people find that whole life insurance can be a useful way to grow their wealth over time, especially for those who wouldn't set aside money to invest regularly otherwise.

Nonetheless, using life insurance premiums for this purpose is, in many ways, a kind of forced savings program with sometimes high fees. If you were to invest the same regular amounts in the market (an index fund, for example), there's a good chance you would see better returns that way.

What About Life Insurance Through Work?

Although many jobs offer life insurance as an employee benefit, there are several reasons you might want to consider an individual policy for yourself, independent of your job. First, life insurance through work is often not enough since coverage amounts tend to be lower.

Additionally, you may not be able to take your policy with you when you switch jobs. Or, if you do, it may be significantly more expensive. In the meantime, if you've waited before getting an individual policy, rates may be higher when you're ready, since premiums rise as you age.

What Does Life Insurance Cost?

People who are most likely to need life insurance often have a lot going on financially already. Young families who are trying to balance college funds, retirement savings, student loan payments, down payment savings and daycare (and maybe a well-deserved vacation) may feel discouraged at the idea of tacking on another bill after paying their other living expenses.

Fortunately, life insurance doesn’t need to set you back thousands of dollars. Term life insurance, which offers coverage for a set period of time (usually 10 to 30 years) tends to be relatively inexpensive. 

When you apply for life insurance, you’ll submit information about your age, gender and lifestyle (skydiving instructors and marijuana users may pay more than people without risky hobbies). 

Some online companies offering term insurance may be able to approve your application right away; in other cases, you might need to get a medical screening and have underwriters review your life insurance application before they can decide if an offer for coverage can be made. Based on your age, health, tobacco use and other risk factors, they’ll make a decision on if an offer can be made. If so, they’ll give you a rating that determines what you’ll pay in premiums.

A nonsmoking, 30-year-old woman in excellent health who lives in Alabama and wants a $500,000, 20-year term life insurance policy may pay about $25 per month for her policy, according to a Fabric estimate (this is the best rate class offered by Fabric). If she applies when she’s 35 (and in “good” vs. excellent health), she may pay about $31 per month.

Depending on your individual situation, you might want to double-check your current habits for temporary factors that could affect your rating. Price says, “I personally was getting a policy, and I was taking weight-loss shakes. Your body only uses what it uses, and I almost got pushed to a lower rating.” 

The life insurance medical exam flagged higher-than-expected amounts of protein in her urine test, which could signal kidney problems—or a fad diet. People taking prescription supplements in pregnancy, bodybuilders and others might find that their diet can cause unusual test results.

Give underwriters a heads-up if you follow a specialized diet plan. You can also appeal if you think a life insurance company denied coverage or offered a higher quote for incorrect reasons.

Factors to Consider When Choosing Life Insurance

Everyone's got a different personal situation, and as a result they may have different life insurance needs. Still, some things to consider include:

• The cost of the premiums

• The length of the term you're looking for

• Requirements for applying (life insurance applications will ask you for different information, ranging from your health situation to your employment status and whether you enjoy skydiving)

• Whether or not you're willing to take a health exam, or if you're looking for a no-exam life insurance policy

• Policy turnaround time—the underwriting process can take weeks, but some companies (such as Fabric) have the ability to let many applicants know immediately if they've been approved

Life insurance isn’t necessary for everyone, but most people who combine their financial life with others—in other words, almost anyone with a family—can probably benefit from at least considering it. 

Better yet, this “adulting” task is probably easier to fit into your schedule and budget for than you’d expect.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.