At one time or another, almost everyone has been approached by an employer or financial advisor, who has suggested that they buy life insurance.
Do you need it? The answer depends on whether you have dependents — children, a spouse or other people who rely on you for financial support. If you do — and you want to protect their financial health after you die — the answer is yes. If you don’t, life insurance is an unnecessary expense. It’s that simple.
Now, some people — many of them insurance agents — will quibble with that assessment. They’ll say that you would be wise to buy insurance when you’re young and dependent-free to protect your “insurability” later. In other words, if you are a single 25-year-old, you might want to buy insurance now to ensure that you can get insurance some day, if you happen to contract a dread disease when you’re older, married and have children. Wow.
Other people will try to sell you “whole life” insurance as an investment. Insurance is a lousy investment. The list of reasons why is longer than my arm. But they start with the fact that there are huge fees embedded in insurance policies used as investments and those fees alone can submarine your returns.
However, life insurance is an irreplaceable financial tool when used in the right circumstances. Those circumstances are when you are a bread-winner; have children; have few assets and a lot of debts. In this situation, your dependents would need a lot of financial help in the off-chance that something happened to you. For that risk, there’s nothing quite like term life insurance. Because the chance of you dying is slight, you can buy a big policy for a relative pittance and, for just a tiny bit more, you can buy so-called ‘level premium term” to make sure your premiums stay low for the 10 or 20 years you’re likely to need the product. But after both your kids and assets have grown, you probably won’t need insurance. Any financial help your kids and spouse would need at that point could probably be paid through your accumulated assets. And that’s good because term insurance premiums rise as you age and become downright unaffordable when you’re old and more likely to die.
How much do you need? To figure it out, take a look at your current budget and circumstances and what you think might happen if you or your spouse were to die. Let’s say, you are the only breadwinner, earning $100,000 annually; have a home mortgage of $250,000 and have two toddlers at home. You might decide to get enough insurance to pay off the mortgage and provide five years of living expenses for your family, so that your spouse wouldn’t have to worry about working until the kids were in school. If you have some savings, you can subtract that amount from the insurance need, but guessing a little high doesn’t hurt you. Insurance is typically sold in $250,000 blocks. And when you’re young and healthy (assuming you’re a non-smoker) the difference in cost for $250,000 in insurance versus $500,000 is pretty minor — a few hundred dollars annually. So, when in doubt, round up. You can also use the calculator on the right to estimate your need.
If you’re in a one-income family, don’t assume that you won’t need insurance on your non-working spouse. Although a stay-at-home spouse may not have an income to replace, he or she performs valuable services that you would have pay for if he or she died. If you don’t know how much insurance would be appropriate for a stay-at-home parent, start researching the cost of a full-time nanny. How long would you need that nanny? Would you need to hire somebody to help you cook — or budget for much higher restaurant expenses? Would you need help chauffeuring the kids around even after they’re old enough to care for themselves after school? Some estimates have put the cost of replicating the job of a stay-at-home spouse at over $60,000 annually.
