Life insurance might be something you spend a lot of time thinking about – or it might be something you don’t think about at all. If you do think about it, you have probably questioned whether you have enough or whether you pay for too much of it. While no one can say for certain whether you need life insurance, there are several questions you should ask yourself to help you decide.
When discussing life insurance, it is important to realize there are different types available. Term life insurance is a type of life insurance that covers you for a set number of years (e.g., a 20-year term or a 30-year term.) If you die before the term expires, your beneficiaries receive the amount listed in your plan. If you die after the term expires, your beneficiaries receive nothing.
The second type of life insurance is often referred to as whole or permanent life insurance. Unlike term life insurance, whole life insurance doesn’t expire; there is a guaranteed payout upon your death. As you might guess, however, whole life insurance policies are significantly more expensive than term life insurance policies.
As stated above, there is no easy way to predict whether you need life insurance. After all, no one wants to die young and no one wants to pay for something they won’t use. The following questions can be helpful in deciding whether life insurance is worth purchasing and, if so, how much to purchase.
The first question to ask yourself is how old you are and whether you have any dependents. A single 25-year-old with no dependents likely has less need of life insurance than a married 35-year-old with children. Odds are that no one is depending on the 25-year-old to produce an income. Conversely, if the 35-year-old dies prematurely, he or she will leave behind a spouse and children with one less income to support them.
It is also important to ask who will have to pay your debts should you die early. For example, the 35-year-old with a spouse and children will require more income if the couple had been paying off a 30-year mortgage. On the other hand, if the couple was, or was nearly, debt free, the loss of additional income will not be felt as strongly.
Finally, it is helpful to understand that the need for life insurance often decreases as you age. For example, many people are able to pay off many of their debts and build up their net worth by the time they reach 50-60 years of age. Similarly, any children they have are likely reaching an age where they can support themselves. In these cases, it might make sense to reduce, or even eliminate, your life insurance policy and invest that money elsewhere. However, if you are young, married, and have children or other expenses, purchasing a higher life insurance policy might make more sense.
Ultimately the question of how much, if any, life insurance to buy is up to you and depends on your individual circumstances. If you need more to feel more secure, then that is the amount you should purchase. If you know that your debts and expenses won’t be that high, however, you may want to consider purchasing less insurance and investing that money somewhere else where you are more likely to see a return. As always, if you have additional questions, you should speak with a financial advisor.