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Finance for Parents

Do I Really Need Life Insurance?

By Jessica SillersMar 24, 2020

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

Driving them around to swim meets? Check. Using up a vacation day on random teacher’s workdays? Check. Oh, and there was that time that our first grader came home with an assignment to bring in 100 of something—and 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.

Which begets a common question about a parental chore you’ve probably heard a lot about: life insurance. Do you really need life insurance? 

It depends, but the more responsibilities in your life, the stronger chance that a policy could be right for you. 

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Who Needs Life Insurance (And Who Doesn’t)

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.

Parents vs. Child Free

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 insurance now, since life insurance tends to be cheaper the younger 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.

Homeowners vs. Renters

Besides kids, debt is the main financial factor to take into account when you’re thinking about life insurance. 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. 

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.

Savers vs. Ready for Retirement

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, you may have less need for life insurance as 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 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.

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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 for replacing lost income if someone were to pass away. Premiums 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, which can be expensive (think somewhere in the ballpark of $7,000!). 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 are 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.

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 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.

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.

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 life 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.

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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 screening 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.

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 than you’d expect.

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

Ready to take the plunge? Apply for term life insurance in 5 minutes, totally online.

This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific financial advice or to serve as the basis for any decisions. Fabric Insurance Agency, LLC offers a mobile experience for people on-the-go who want a easy and fast way to purchase life insurance.

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Written by

Jessica Sillers

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