“Do I need life insurance?” is a question that doesn’t get asked enough because let’s be honest: life insurance is not a fun topic to talk about. Admitting you may need a life insurance policy forces you to admit you’re gonna die. While we all know this will happen at some point, our mortality is something we don’t like to face often. After all, we aren’t all Ricky Bobby and planning on living into our late 200s. About 50% of Americans have a life insurance policy, while 30% say they need life insurance but don’t have it yet. (1) These numbers are scary when you also consider that most Americans can’t cover a $1,000 emergency.
So let’s grab a glass of wine and a box of your favorite knock-off Girl Scout cookies from Aldi’s, take a deep breath, and talk about life insurance.
- Not everyone needs life insurance, but you need a policy if someone depends on you or your income for their livelihood
- Depending on your financial situation, you’ll likely need a separate policy from what you might get at work
- You don’t need life insurance on your children
- Get life insurance as soon as you need it, as it will be cheaper and you may be ineligible later
- Not all life insurance policies are the same; avoid whole life and other permanent life insurance products
My life insurance cautionary tale from the trenches
For the longest time, we did not carry independent life insurance policies. My husband, the member of our family who brings home the bacon to the Budget Beagle, had a policy at work that was enough to cover me should something happen. We had the house covered and enough to float in our retirement accounts that I could live off of what I made, even after a lengthy sabbatical to cope with grief and adjust to what a life without him might look like. (The wine can come in handy when picturing this.)
We can’t talk wine without a Cougar Town reference.
I didn’t have a policy through work, but I’ve never made a 6-figure salary at any point in my career. My husband makes 2x what I made because we chose very different career paths with our engineering degrees. We’ve lived a frugal lifestyle since we met as broke college students, so he wouldn’t need to supplement my smaller income if something happened to me. He can live comfortably off of less than what he makes alone.
This plan has worked for us for over a decade of being together because we don’t have any kids.
The adoption talks, however, are starting again in our household. So are the Financial Independence, Retire Early ones. Adding a kid not only increases how much we’ll need to live, but it will decrease my earnings potential should something happen to my husband because I will either need to hire help or cut back my hours to parent full time. I figured we’d cross that life insurance bridge a few months to a year before we started the adoption process.
Then I got some health news I wasn’t expecting. Now, I’m likely ineligible for coverage with a new life insurance policy.
Fortunately for me, this isn’t a big issue, as we already know my husband can survive, even with a kiddo, on his income alone with the nest egg we have squirreled away for retirement.
I, however, would be up Schitts Creek without a paddle if something were to make him illegible to get a policy. So guess who has two thumbs and priced some policies for her husband for his birthday present this year.
This budget lady.
If, God forbid, we were to find ourselves in a situation where he couldn’t get a policy, I would either have to choose between not becoming a mom or struggling to retire as planned. That’s not a position I ever want to face, especially when the alternative to live the life I want will cost less than $20/month, which if we’re being honest is less than what I spend on books and he spends on video games many months.
While I could still get a guaranteed policy life insurance plan, these are WAY more expensive and not ideal for our financial planning. They likely won’t be for you either. (We’ll cover types of life insurance below.)
I’m not one to employ scare tactics, but my story above was that catalyst to write this article, as I want to save you from the dilemma I faced.
Don’t be a pickle, Rick. Take the time to CYA with life insurance now while you can.
Do I need life insurance?
That said, not everyone needs life insurance. If you are young, healthy, and single, you can likely skip this defensive strategy on Rung 3 of the FIRE ladder as you fortify your financial situation. The better your genes, the more likely you can push this cost down the road until you get married or start a family.
Once you no longer meet all of the criteria above, it’s time to start looking at life insurance.
If, like me, you struck the genetic lottery and have a family history of:
- Cancer
- Stroke
- Hypertension
- Autoimmune diseases
You may want to consider getting a policy sooner rather than later. My five-year ongoing battle with chronic inflammation, IBS, and Hashimotos should have been a signal for me to stop and reassess our life insurance stance.
Other situations to assess and consider when determining if you need life insurance.
- If your significant other needs your income to sustain their lifestyle: Whether you’re cohabitating or married, with kids or not, life insurance is critical if you depend on someone else’s income coming into the household every month to pay bills. Make it a sexy Valentine’s Day this year and buy each other policies. Ooh la la.
- If you have children: Not only are kids expensive, but someone has to feed them and make sure they don’t kill themselves jumping off the roof onto the trampoline. They gotta eat, and most parents want to support their kids in some way with higher education, like helping pay for college. If you have kids, consider getting a life insurance policy on you and your spouse or significant other, if still together, to cover the kiddos until they are 18 and you can boot them from the nest. If they’re working adults still living at home, kick them out now, you don’t need coverage just for them.
- Or other dependents: If you don’t have children but have other family members that depend on your income to live or need your assistance with their day-to-day living, such as a disabled parent or sibling, you should also have a policy to make sure they are covered should something happen to you.
- If you still have debt: If you have a mortgage or a car payment and are married, your spouse will inherit your assets, but they’ll also be on the hook for the payments. Having enough life insurance to wipe the slate clean can be a godsend to help your spouse breathe a little easier in the rough season of life after losing you. The last thing you want to do after having your life flipped 180 is to have to uproot from your home or struggle to get to work to make enough to pay the bills.
When in doubt, get a policy! You can always cancel it later. The kind of life insurance best for most people is relatively cheap, and the peace of mind that you’re covered in the worst-case scenario of losing someone you love dearly can be priceless.
Not every financial decision has to make the most money sense. We’ve mentioned this when discussing if you should pay off your mortgage early. The same holds true for life insurance. The whole point of financial independence is freedom, and that includes freedom from stress and worry about your financial future. If you don’t “need” a policy but sleep better with one, keep it.
What if I have a life insurance policy through my employer?
Often, but not always, you will need an independent life insurance policy outside of what you may receive as a benefit from your employer.
For one, these policies often don’t jump with you from job to job. If, for example, my husband and I found ourselves in the reverse work situation, I would feel stuck in my job, because I now can’t get a life insurance policy outside of my employer. That can create a really toxic work environment. Don’t give your employer that power.
What’s more, employer plans are usually only around one or two times your income. That typically doesn’t even cover a mortgage on your primary residence.
When assessing your situation, you’ll likely find you want more coverage than what you can get through work.
Do I need life insurance on my kids?
I’ve angry raged on this topic with our Do You Need Life Insurance for Children? article. The overwhelming majority of people do not need insurance on their kids, regardless of what a financial advisor or insurance agent trying to sell them a policy might claim. Remember, they get paid to sell you a plan, so they don’t necessarily have your best interest at heart.
Our key takeaways from that article:
- You should use life insurance as a tool to help cover your family/dependents who depend on you for financial support.
- Since children are dependents and very few generate an income used to support their family, most children don’t need life insurance.
- Permanent life insurance, such as whole life, can be useful for children if they have a disability or are at high risk of uninsurability in the future because of illness. These types of policies, however, offer very little in coverage, so they still might not be worth the cost.
- A rider on your own term-life policy or a DIY plan of investing what you would have paid in premiums is almost always a better option.
What type of life insurance do I need?
There are two major categories of life insurance: term life insurance and permanent life insurance.
Term life insurance policies have a fixed policy amount your beneficiary gets when you pass. You pay a fixed premium every month (or annually) for that death benefit until the policy expires. Term policies typically range 10-30 years. If you reach the end of the 10-year term and you’re still alive, you don’t benefit from having the policy, similar to paying premiums for auto insurance without needing to file a claim.
Permanent life insurance policies live as long as you do, so long as you keep up with your premium payments. There are several types of permanent life insurance. The most popular is whole life insurance. With permanent life insurance, you usually get a certain death benefit that will go to your beneficiary, along with a cash value savings and/or investing option. This cash value dies with you, leaving only the death benefit when you pass. Some financial advisors will pitch this to you as a great tax-advantaged plan. Essentially, though, these are a very expensive way to invest in the stock market or an extremely high-fee piggy bank you then borrow your own money from later.
You’re almost always going to do better purchasing a term life insurance policy, which usually runs an order of magnitude cheaper, and investing the difference in what a permanent life insurance policy would cost you into the stock market.
A special note to those in a similar situation to me: Term life insurance goes through an underwriting process where they check your medical history and assess how likely you are to cost them money. You may find yourself “uninsurable” depending on your situation. In this case, you can explore a guaranteed issue life insurance policy, which is a type of whole life insurance policy that allows you to skip this medical assessment. You pay a premium on your premiums for this type of coverage, which may or may not be worth it. For us, it isn’t worth checking for me.
How long of a term policy to get depends on your situation above. Once you reach financial independence, you can self insure and no longer need to pay someone else to cover you. Everyone’s path to financial independence takes a different journey depending on their goals, discipline, and situation, so their insurance needs vary, too.
Target your policy length based on when you’ll clear the situations noted above.
Final thoughts
How’s that glass of wine coming? I know this isn’t a fun topic, but it’s an important one if you love the people in your life and don’t want them to have to suffer financially as well as emotionally when you pass. We hope all our brigadiers will reach the point where they stand on top of the FIRE ladder and bask in the glory that is financial independence. When that time comes, thank your life insurance policy for all the security it has brought you, and then Marie Kondo it bye-bye. Until then, make sure you and your loved ones are covered with a cheap term life insurance policy.
Have a specific question? We aren’t insurance professionals, but we’ll try to help. Drop us a comment below, or ask the hive mind in our budgeting and personal financial community.