How to Know When You Need Life Insurance

How To Know When You Need Life Insurance

Life insurance is one of those topics that nobody really likes to talk about because, well, who likes to talk about dying? It’s also one that gets a bad rap because of the poor behavior of a large number of salesmen who push it. The lack of conversation is unfortunate, as life insurance is one of the foundational pieces of a secure financial lifestyle.

In order to clear up some of the confusion around life insurance, I’m starting a four-part series that will explain its importance and guide you through the process of purchasing a policy that’s right for you and your family. You can follow along with the entire series here:
-Part 1: How to know when you need life insurance
-Part 2: How much life insurance do you need?
-Part 3: How to choose the right type of life insurance
-Part 4: A step-by-step guide through the process of actually buying life insurance

Today we’ll talk about the types of people who have a need for life insurance, as well as those who don’t. By the end of this post you should have a good idea of whether it’s right for you.

What is the purpose of life insurance?

Back when we talked about the purpose of creating a financial plan, building financial security for our families was one of the primary objectives. Life insurance is one of the building blocks of that security.

Life insurance allows us to ensure that the people who depend on us financially will be taken care of if we die.

As a young parent, this is the primary, and likely only, purpose of life insurance. If you ever talk to an insurance salesman, they will likely try to convince you that life insurance can also be a great investment. Don’t believe them. You can read my in-depth analysis of why life insurance is a poor investment if you’d like more detail on the topic, but for our purposes here I’ll keep it simple and just say that you should ignore that aspect of it.

The primary reason you as a parent should be thinking about life insurance is to make sure that no matter what your family would have the financial resources to handle their basic needs.

Who needs life insurance?

So if the primary purpose of life insurance is to protect your family, it makes sense to start looking into life insurance as soon as you know that you’re starting a family. If you already have children and you don’t have life insurance, now is the time to start considering it.

It’s pretty clear that a working parent should have some level of life insurance coverage. If that parent were to die, the primary purpose of the insurance would be to replace his or her income. It will likely take at least a few years to fully adjust to life without that income, and in some cases it might be much longer. In any case, using insurance proceeds to replace that income for at least some period of time will go a long way towards providing the financial security your family needs.

What may not be as clear is that stay-at-home parents likely need a good amount of life insurance as well. If you are a stay-at-home parent and you died, who would take care of your children? Unless your spouse quit his or her job, which would bring about its own set of financial needs, your children would likely require at least some level of daycare. This could be accomplished in any number of ways, but especially with younger children could be very expensive. This need alone often requires life insurance on the stay-at-home parent.

According to Salary.com, the average stay-at-home mom is worth $113,568 per year. That’s worth keeping in mind when evaluating your own situation and the need for life insurance on a stay-at-home parent.

The other type of person who should consider life insurance is a married person with debts that their assets couldn’t cover. As an example, a married couple might be able to afford a mortgage when both are contributing towards the payments, but it might be a strain if just one was left to do it alone. In that case, some amount of life insurance might make sense to either pay off the mortgage or help with the payments.

Who doesn’t need life insurance?

If there isn’t anyone who depends on you financially, then you likely don’t have a need for life insurance. This includes most people who don’t have children (noting the exception above of married couples with debt). It also includes parents whose children are grown and are no longer financially dependent upon them.

If you have enough savings outside of retirement accounts that could care for your family for years if you died, then you don’t need life insurance. This is going to be a very small percentage of the population, especially among new parents.

Next Steps

Once you’ve identified the need for life insurance, the next step is to determine how much you need. I’ll address this question with a comprehensive step-by-step guide in next week’s post.

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Photo courtesy of AndyBennettPhotographer.co.uk

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21 comments… add one

  • Monica @MonicaOnMoney December 16, 2013

    This is such an important decsion and I’m amazed at how many people don’t have insurance (when they should). Thanks for this reminder, especially during the holidays.

  • Tonya December 16, 2013

    Great info Matt! I’m single and don’t have kids so I don’t need it at this point in my life. Like Monica said there are probably a lot of people who don’t have it who really should.

  • John S @ Frugal Rules December 16, 2013

    Good post Matt! Life insurance is such a huge decision for many, yet so many overlook it. I’ve seen how not having it can really impact a family in a hugely negative way. It’s certainly not a “sexy” thing to talk about, but in the right situation, is incredibly important.

    • Matt @ momanddadmoney December 16, 2013

      Absolutely John. One of those things that’s nice to get handled so you hopefully don’t have to think about it again for a while.

  • DC @ Young Adult Money December 16, 2013

    I absolutely need life insurance and getting it is one of my top personal finance priorities for 2014.

  • Done by Forty December 16, 2013

    I’m on the fence as to whether we really need our term policy, as we have no children and now the mortgage is gone. But, at least until my wife finishes her PhD we figured it makes sense, I guess, to keep it around…just to make sure she’d be able to finish up her education regardless of what happened.

    • Matt @ momanddadmoney December 16, 2013

      That seems like a reasonable enough reason for keeping it around. You could always look into reducing the face value though if you want to save some money.

  • Stefanie @ brokeandbeau December 16, 2013

    Thankfully, no one depends on me financially right now, so it’s one less expense I have to worry about.

    I’ve also got a slew of posts I published before anyone was reading the blog, perhaps I will resurrect them, start a #tbt for the blog.

    • Matt @ momanddadmoney December 16, 2013

      I figured that if I have content I think is good but no one actually saw, it’s providing the same value to republish it now as it would to create a whole new post. Definitely worth thinking about.

  • Elroy December 17, 2013

    One small suggestion, if you consider yourself to financially independent, you don’t need Life Insurance. This can mean you have a bulk of your funds in retirement accounts. I’m setting my wife up with 72(t) information [....] and looking for someone I trust to help her in case I take my dirt nap prematurely. There are other tricks as well to get at retirement money. The final consideration is, my annual premium is like $1200/year. In 10-15 years, that may be peanuts [....] and we may as likely just keep the LI. Time will tell.

    Thanks!

    • Matt @ momanddadmoney December 18, 2013

      You make a good point. Given that life insurance is primarily a way to protect against the loss of future income, then someone who’s reached a point where they no longer need income may find that they don’t have a need for life insurance.

      It’s good to hear that you’re taking the time to make sure your wife would know what to do if you weren’t around. Hopefully it’s never needed, but it would be invaluable if the situation actually came up.

  • BrokeMillennial December 17, 2013

    This is a great overview. I’m in the no-need category right now as I have zero dependents, no spouse and no debt. It wouldn’t be a financial burden on my parents to “settle my estate” (or have a funeral) — but I do have enough in savings for that to be covered anyway. The only thing I don’t really have sussed out is a way to give my parents information to access all my accounts in the case of my death. I would like to create a will soon for this purpose. My parents recently overhauled their estate planning and sent an “action plan” to my little sister and me so that we knew who to contact if they both died at the same time. Morbid, but really important.

    • Matt @ momanddadmoney December 18, 2013

      Wow, your parents are on top of things! As morbid as it is, that’s really pretty awesome of them. It would make things so much easier on you guys if it was ever needed (hopefully not!).

  • Shannon December 17, 2013

    I think this is such an important topic, and something else to note is that it is better to get it before you are 40 while it is still an “affordable” option. After 40 life insurance gets difficult to obtain and expensive.

    • Matt @ momanddadmoney December 18, 2013

      It’s definitely helpful from a cost perspective to get it when you’re younger, though I wouldn’t buy it solely for that reason. Getting it at a lower cost is only helpful if it’s something you’ll actually need.

  • Brian @ Luke1428 December 18, 2013

    We did not purchase life insurance until after we had our first daughter. That first policy was on myself. Since then we have also taken out a policy on my wife. Our goal is to have the surviving spouse have as much flexibility as possible to make wise choices should something unfortunate happen to either of us.

  • 2-copper-coins.com December 18, 2013

    Thanks for a straight forward explanation of an incredibly bloated market, life insurance is something so few people know much about. They are often talked into buying policies they don’t need because lets face it, most of us are terrified of dying. I love your sentence “If there isn’t anyone who depends on you financially, then you likely don’t have a need for life insurance..” A simple litmus test which can keep people from buying a policy they don’t need.

  • Brent Applegate December 20, 2013

    Thanks for re-posting. I think term is important as well. We bought a shorter term when our first kid was born, and now regret not buying longer. Looking forward to the rest in the series!

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