Do I Need Life Insurance?

Key Takeaways

• Life insurance provides financial protection for your loved ones: A life insurance policy can help cover final expenses, pay off debts, replace lost income, and provide financial security for your beneficiaries after you pass away.
• Life insurance can be beneficial in various life situations, such as starting a family, caring for aging parents, replacing income, covering burial expenses, transferring wealth, paying off mortgages, reducing debt, taking advantage of tax benefits, and protecting a small business.
• Life insurance should be considered even if it may not seem necessary, as it can still provide peace of mind and financial protection.
• Term life insurance provides coverage for a specific period, whole life insurance provides lifelong coverage with cash value accumulation, and universal life insurance offers flexibility and growth potential.
• Planning ahead is essential to ensure that you have the right coverage and policy type for your financial obligations.

Maybe you've just reached one of life's major milestones like marriage, parenthood, homeownership or retirement. Maybe you're trying to finally get your finances in order. Or maybe you've recently witnessed a close friend or relative struggle financially after the loss of a spouse or parent.

A life insurance policy could help provide financial protection for your loved ones when you're gone — protection that could help them cover final expenses, pay off debt or replace lost income. A policy could also allow you to leave behind an inheritance or donate to charity after you pass away. Life insurance is there to meet the needs of people from all walks of life.

We will explore some scenarios that could help you develop a deeper understanding of the value of life insurance — and decide if a policy could be a good choice for your needs.

Unexpected Life Changes

Change — whether good or bad — is a part of life, but there are ways you could prepare for the unknown. This is something that Stella, a 42-year-old marketing consultant and single mother of two, plans to keep in mind when planning for the future. When she and her husband divorced a year ago, she received full custody of her two young children. Their house was put in her name, and she became fully responsible for making the mortgage payments.

While Stella does receive some child support, her financial responsibilities have increased significantly. Additionally, she wants to make sure she can afford to put both of her children through college. After reviewing the life insurance policy she and her ex-husband purchased when they got married over a decade ago, Stella realizes she wants to change her beneficiary and increase her coverage to provide adequate protection for her new situation.

A universal life insurance policy could be a good fit for Stella and her family because it offers flexibility — as it's designed for a changing future. You can change, within certain limits, the amount of your coverage, your premium payments¹ or your death benefit at any time. A universal life insurance policy also helps build cash value you can access, subject to the terms of your policy².

Starting a Family

Harry and Aja are a newly married couple in their late 20s. After planning a large wedding and going on a tropical honeymoon, they decide to start living on a shoestring budget. They believe that cutting back could help them meet their goals of buying a home and starting a family. So, they want a life insurance policy for new parents that could help them both protect their future family and address their upcoming needs.

Because they're on a budget — and are still uncertain about what the future holds — a term life insurance policy could be a good fit for them. Term life insurance could provide coverage for a period of 10, 15, 20 or 30 years. Some term life insurance policies are also convertible, which means that they could have the option to exchange their term life policy for either a whole life or universal life policy down the road.

Sandwich Generation

Members of the sandwich generation are responsible for caring for both their parents and children, which could cause additional financial concerns. Alex, for example, is a 53-year-old vice president of technology. His two main priorities are his aging parents and his 14-year-old daughter — and Alex is "sandwiched" in between.

Alex wants to ensure that his parents live comfortably as they get older and wants his daughter to go to a top college someday. In addition to caring for the needs of his loved ones, he also wants to stay on track with his retirement preparations.

As Alex is concerned about having enough income to live on in retirement, a whole life insurance policy could be a good option for him. With a whole life policy, he would get protection for his entire life. Additionally, this policy type builds cash value — and may also pay dividends, which could be received as cash payments.

Now that we've examined several specific life scenarios, let's review some additional financial reasons to buy life insurance.

Replacing Income

One common reason to purchase life insurance is income replacement. Research notes that, in the U.S., at least one in three families are likely to face financial hardship within a month of the death of a primary wage earner, and more than half of families face financial hardship within a year. The life insurance death benefit paid to the beneficiary after an insured’s death can be used to replace household income, especially if the insured person was the family’s primary wage earner. Some life insurance policies — including whole life and universal life — accumulate cash value over time. If you are in need of additional income, you can withdraw or borrow this money from the policy while you are still alive.²

Typically, a primary goal of life insurance is to help provide financial security for your beneficiary — the person who will receive the death benefit of your life insurance policy. To do that, you will likely need to think about the long term. If you have an employer-sponsored life insurance plan, it may not provide enough coverage. Plus, you might not be able to keep the policy if you change jobs. However, conversion privileges may apply, and you should review your policy for details.

It's also important to consider stay-at-home spouses when it comes to life insurance. Stay-at-home parents provide many vital duties and services at home that have monetary value — even if they aren't bringing home a paycheck. If they were to pass away unexpectedly, it could cost quite a bit to replace what they do, especially in terms of child care.

Helping to Cover Burial Expenses

The national median cost of a funeral (with funeral and burial) is nearly $8,000.³ Not having the money on hand to cover these costs could make an especially emotional time more stressful, but planning ahead could help to alleviate some of this stress. Your beneficiaries could use the benefit to help cover burial expenses. Some life insurance policies also allow you to list a funeral home as the beneficiary of your policy. As you decide what's right for you, discuss your plan with a legal expert.

Transferring Wealth

Life insurance can play a significant role in your long-term financial planning, as well as your estate planning. After decades of working hard and saving for retirement, some people may want to be able to preserve the wealth they have created over the years.

One way you might do that is by purchasing a life insurance policy so your beneficiary receives a death benefit. This could be a cost-effective way for you to leave an inheritance and help your beneficiary save on the amount of taxes they pay. By working with your financial representative, you can determine which life insurance option is suitable for your needs, as well as those of your beneficiary.

Paying Your Mortgage

Unfortunately, when someone passes away, their debts aren't wiped away. A life insurance death benefit can ease some of these debts by providing cash to help pay them off.

When you buy a new house with a mortgage, the plan is generally to pay off the home loan over 15, 20 or even 30 years. If you die before paying off the entire mortgage, it could be difficult for your family to make payments without your salary, and they may face a tough decision. They may then be compelled to sell, even if the market isn't good.

You could purchase a life insurance policy in an amount that would help cover some or all of the outstanding mortgage. This may help your family keep a valuable asset rather than another debt. This could be important if others live with you, like your spouse and children. Life insurance could help them keep their home even after you've died. Knowing that life insurance could help cover at least a portion of the expenses and allow your family to stay there without any significant disruptions is a powerful benefit.

Reducing Debt

Your debt is just your problem, right? Well, it depends. Most debts are only your responsibility. If you die, the creditors will generally try to get repaid out of your estate, which is everything you owned. But if there's not enough to pay everyone back, the creditors generally will not be able to go after your family members.

However, if anyone cosigned your debt, then they may be fully responsible to repay all of it after you die. Keep this in mind if you asked anyone for help to qualify for anything, like your parents for your student loans. When it comes to student loan debt, the government will discharge and cancel your federal loans if you die, according to the U.S. Department of Education.⁴ But your private student loans may be discharged and canceled only if you're the sole person on those loans. Co-signers on student loans pass debt burden if deceased.

With credit cards, your estate will handle paying off your debt if you pass away. However, if you have a joint credit card account, guess who would then need to pay off that debt in its entirety? That's right — the other person on the account.

If a loved one could end up shouldering your debt in the event of your passing, a life insurance policy could help them pay it off.

Helping to Reduce Estate Taxes

Taxes, especially estate taxes, can be a concern for some people. Estate taxes are calculated based on the total net value of a deceased person's assets at the time of their death. A life insurance death benefit can be included in these assets if you name your estate as your beneficiary. This can lead to your estate being taxed at a higher rate, leaving those who would inherit your estate with less money over time.

Many choose to name their spouse as their beneficiary because, under current tax laws, most assets passed on to a surviving spouse aren't subject to estate taxes. That may be a conversation to talk about with your spouse and estate planning attorney if you feel it's a good option for your situation.

Any life insurance policy you do have could help to cover at least a portion of the estate taxes that your loved ones might face. Listing someone as your beneficiary rather than listing your estate also can help to reduce the possibility of your loved ones getting a big tax bill after you pass.

You may want to consult with a tax professional to determine the right path for you and to see if there are ways to reduce your estate taxes with your life insurance policy.

Taking Advantage of Potential Tax Benefits

Life insurance can also provide tax advantages that could be helpful when preparing for the future. According to the Internal Revenue Service (IRS), life insurance benefits received after the death of an insured person are not likely to be included in your gross income and usually do not need to be reported.⁵ Your beneficiary typically would not owe estate or income taxes on the benefit once they receive it.

Permanent life policies can also allow for tax-deferred growth, which means there's potential for the cash value in the policy to grow over time. It's also possible to make withdrawals from that cash value. These withdrawals may not incur tax liability in some scenarios, which means they could potentially help to supplement your retirement income. However, any withdrawals will affect the death benefit that your beneficiary would receive and could cause the policy to lapse.

Paying for College

When it comes to planning for the costs of college, life insurance may not be the first step you factor. But if you end up unexpectedly passing before your child is in college, your life insurance could help cover the costs of their education. In addition, if your child is out of school but paying student loans, the death benefit also could help to reduce some of those expenses or potentially cover them completely.

Protecting a Small Business

Millions of Americans are small business owners. With that title often comes a lot of responsibility, and it usually doesn't end with your own family. If you own a small business, the company relies on you. Even if you've trained a replacement and have a plan for someone to take over, your staff generally expects your help with the transition. The sudden death of the owner could cripple a successful business. Life insurance could help give your other business partners and employees the money they need to overcome this setback.

It's also one way to help handle the transfer of ownership between partners. Through a buy-sell agreement, business partners buy life insurance on each other. If one dies, the other partners use the life insurance funds to buy out the deceased partner's share in the company. Without this setup, the partial ownership would go to the family members instead, who may not be ideal partners to help you run the business.

Having a plan in place if something were to happen to key people could make a significant difference in the long run. It also can help to ensure that your business stays in operation and doesn't face gaps in continuity.

Building Cash Value

Permanent life insurance, which never expires as long as scheduled premiums are paid and the policy does not mature, may build an added benefit called cash value. The insurance company invests the money so the money has potential for growth.

While you're still alive, you can borrow against the cash value for any reason, such as paying for a wedding, buying a new car or saving for retirement. Loans can reduce death benefit and cash surrender value, leading to policy lapse.

If you die before the loan is repaid, the insurance death benefit will be reduced by the loan amount, and your beneficiary will receive the remainder.

Donating to Charity

Do you give regularly to charity? Life insurance could help you make an even larger donation. Rather than donating money to your charity each year, you could put money toward a life insurance policy. For example, depending on the type of life insurance you have, you may be able to name the charitable organization as your beneficiary. Then, when you die, the death benefit will go to the organization as a gift from you. There are several ways to donate to charity through life insurance, and you may want to speak to a financial professional to learn more about your options.

Other Life Situations to Consider

Who doesn’t need life insurance? There may be a few life circumstances in which you probably don’t need life insurance, like the following:

• If you are independently wealthy and know your loved ones would be financially cared for after your death.
• If you are single without any dependents.
• If you are retired or close to retirement (considering insurance premiums increase significantly with age).
• If you are a child or college student.

However, even in these situations, there may be exceptions to the rule. Although you may not think you need life insurance, a policy could still help provide you with peace of mind and financial protection for your loved ones. Here are a few additional scenarios where it could make sense to buy life insurance — for those who think it's not for them.

You Don't Have Children — Yet

You may not have kids now, but your situation could change down the line. Even if you never have children, your policy could help provide financial security someday for your spouse (or future spouse) — or your nieces and nephews.

If you're someone's legal guardian or are responsible for your siblings, a life insurance policy also could help ensure those who depend on you are taken care of financially. And when you purchase a life insurance policy at a younger age, you can generally lock in a cheaper policy than if you were to wait a few years.

You Have Boomerang Children

Let's say your children have left the nest for college. Before you claim true empty-nester status, consider the fact that there's a good chance your kids could return home. In fact, more millennials are living with their families despite an improved job market.⁶

Do you have a daughter or son who graduated from college with a degree in a competitive field? They could have difficulty landing a job — or at least a job that pays enough for them to be fully self-sufficient. A life insurance policy could help offer additional financial protection for them if you pass away unexpectedly.

Having a child return home could also mean an increase in your household living expenses, which could prevent you from saving as much as you'd like to for your retirement. You also could consider an annuity, which could help provide you with a steady income in your golden years.

You Haven't Saved Enough for Retirement

While the ideal version of yourself may have plenty saved up to comfortably retire without debt, perhaps you're falling behind on your retirement goals in reality. If that's the case, know you're not alone.

Many older Americans are carrying debt loads, which makes it increasingly difficult to save up enough to leave something behind for your loved ones. A life insurance policy could help your loved ones pay off debts such as a mortgage — and help you leave behind an inheritance.

So Then ... Do I Need Life Insurance?

Reflecting on your needs and goals, speaking to a financial representative and learning how life insurance might help people in different situations could help you discover the answer to that question. Now, there's not a one-size-fits-all policy when it comes to life insurance, but learning more about universal, whole or term life insurance could help you find the right choice for your needs.

A financial representative can help you address specific questions like “What kind of life insurance do I need?” and “How much life insurance do I need?” You also may want to explore alternatives to life insurance — like annuities and investments — to help plan for retirement and build your future financial security.

Keep in mind that your needs also might change over time, and coverage that works for you now might not be sufficient down the road. When life changes, consider periodically examining your life insurance coverage to see if it still meets your needs.

Peace of mind could be one of the most valuable benefits a life insurance policy provides. Whether you are moving into a new part of your life after a big change or simply getting your financial plan together, a life insurance policy could help you protect your loved ones from the uncertainties of tomorrow.

Footnotes & Sources

1. There must be enough cash value in the policy to cover monthly charges if a lower premium is paid than the amount selected at issue or if a premium payment is skipped. Additional premium payments may need to be made to keep the policy in force.  Increases in coverage are subject to underwriting based on health and other factors.
2. Withdrawals may be subject to charges, withdrawals of taxable amounts are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty) and loans (e.g., interest is charged on loans, they may generate an income tax liability, reduce the Account Value and the Death Benefit, and may cause the policy to lapse.  You should always determine whether a withdrawal or a loan is preferable for your individual situation.
3. National Funeral Directors Association. https://nfda.org/news/statistics.
4. If your loan servicer receives acceptable documentation of your death. https://studentaid.gov/manage-loans/forgiveness-cancellation/death.
5. Life Insurance & Disability Insurance Proceeds. https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds.
6. More adult children are moving back home. 10 readers share why. https://www.boston.com/community/readers-say/readers-share-why-more-adult-children-are-moving-back-home/.