The Number One Reason Why You Need Life Insurance

Most of the time when I hear people talk about life insurance, it comes with a sense of urgency about how you’ve got to get it right now! Or they want to avoid the topic altogether since it sounds too morbid to think about planning for your death.

While that fact may be true, you almost never hear anyone explaining the benefits and why you need it. It leaves me wondering, why is having life insurance so important? Is there any motivation to getting life insurance coverage right now?

But before we discuss the importance of getting life insurance, let’s go over exactly what life insurance is.

Life insurance protects your family, and anyone else who may depend on you for financial support. If you die the people who are dependent upon your income will lose that financial support, which leaves them having to fend for themselves.

Having life insurance in place will help cover some or all of that loss, depending on the amount of coverage you choose. Of course, there are instances where life insurance can be beneficial even if you don’t have any dependents, but we’ll talk about that later.

The Truth About Life Insurance

There are two types of life insurance, the first type, Whole life insurance (or permanent insurance) is a cash value policy that combines both saving and investing into one insurance product.

Whole life insurance serves a dual purpose: 1) protects you and your family against estate taxes and 2) makes insurance companies and agents lots of money. The reason it makes insurances companies and agents a lot of money is because the costs are so high, making this financial product very risky. Studies show that over 70% of the policies sold today are cash value policies, which is crazy!

Why? Because in my opinion, your investment strategy should not be wrapped up with your life insurance plan, the same way your savings plan shouldn’t be susceptible to your investing risks.

Instead, simplify your financial goals. Keep your savings accounts for saving money and your investing accounts for investing. Mixing the two just makes it more confusing and difficult to get a solid rate of return.

Finally, if you die your family only gets paid the face value of your whole life policy! Basically you forfeit all the money you’ve paid into the plan over the past few decades. This is why whole life insurance should not be used an investment; the returns are terrible because the costs are so high.

The second type, Term life insurance, is a much better option – especially for those of us just looking for simple insurance. It provides you and your family coverage for a specific period of time, or term, until the insurance ends. It’s basically like car insurance with an expiration date.

It protects you and if you die within the term of coverage and your dependents will receive the amount the policy is worth. However, if you die after the coverage has expired, your family gets nothing.

For this reason, term insurance is very inexpensive. And in fact many providers, such as www.apia.com.au offer instant quotes online. Of course the younger you are, the cheaper it is and the more coverage you can get – essentially more bang for your buck.

If you still think want to think about investing with your life insurance plan, you’re better off buying term life insurance and investing the difference in something like a Roth IRA.

Why Having Life Insurance is Important

The number one reason you should consider getting life insurance is because your spouse, your children and any other dependents need your financial support to survive. You don’t want to pass away and leave them with mountains of debt, bills and funeral expenses.

My sisters, brothers, nieces and nephews are “the why” behind having life insurance. This is also the reason why you shouldn’t look at life insurance coverage as another bill or something you can put off until later. It’s something you can’t put off until tomorrow because your family will need your financial support when you’re gone.

Protection from the uncertainties of life and the the peace of mind knowing your loved ones will be taken care of, is priceless.

Still not sure life insurance is a necessity? Take a moment to read these two real life stories.

If I could rename life insurance, I’d call it family future insurance, because it’s basically to ensure your family still has a good future after your’e gone.

How Much Do You Need?

The general rule of thumb is to purchase life insurance worth 10 times your annual income. For instance, if you make $50,000 per year (the average household income in America) you need to purchase a life insurance policy worth at least $500,000 (50,000 x 10).

However, when I was listening to the Two Guys and Your Money podcast recently, they asked Jeff Rose (who’s a Certified Financial Planner) this same question. Jeff suggests that young adults might want to consider even 15 or 20 times their annual income.

His reasoning is because when you’re in your twenties, your income is probably the lowest it will be, since you’ll most likely get promoted throughout your career and hopefully earn more money. Starting with a lower income means you need to raise your calculation to at least 15 times your income.

You can also calculate how much you need by using this formula:

From LifeHappens.org

I think Jeff makes a great point and this is something I’ve taken into consideration for my own life insurance needs. Here are some other things to consider about how much life insurance you should have, depending on your individual needs.

Children: For the most part, children do not need life insurance. Yes, there are a few cases where life insurance on a child is a blessing. But the majority of children do not need life insurance since no one depends on their income to survive.

Young Families: If you’re thinking of starting a family, go ahead and purchase life insurance now. The insurance premiums will be cheaper now than when you get older. Plus your future children will be depending on your income.

Established Families: If you already have a family that depends on you and your income, you absolutely need life insurance now! You should also consider purchasing life insurance for the person working in the home. Since the costs of hiring someone to do take care of the domestic needs – like chores, budgeting and childcare – can be quite high.

Single Adults: As a single adult, you most likely don’t need life insurance coverage, because you don’t have any family members who depend on you. The only reason a single adult might want life insurance, is be to pay for funeral costs or if you have a high amount of outstanding debts.

DINKS (Couples with Dual Income No Kids): If you and your partner are DINKS you will both need to decide if you want life insurance. If you’re both making a living, enough to live comfortably on your own, then life insurance will not be necessary. But, if for instance, one working spouse contributes significantly more money to the finances, or you want to leave your significant other in a better financial position, then purchasing a life insurance policy is a good idea.

Senior Citizens: The whole goal in life as this age is to be self-insured, so you no longer need life insurance coverage. Typically you don’t have anyone depending on your income for support, and you should already have a nice nest egg built up to cover any financial emergencies. Being self-insured means you have enough assets and funds available to cover the passing of either spouse, plus enough for the surviving partner to live comfortably.

Getting enough insurance coverage totally depends on you and your family’s situation. I’m a single person with no dependents, and even though I’m debt free, I still have a small amount of life insurance. Mostly to cover any funeral costs or other expenses that might arise.

Peace of mind for my family is the reason I have life insurance. What’s yours?

My family and loved ones are the number one reason why I have life insurance and why you should too. I’d much rather leave them with more than enough, after I’m gone.

Don’t become part of the 35 million households that don’t have life insurance. If you and your family have life insurance, show your support!

This post is part of the life insurance movement, where over 115 bloggers and financial companies are bringing awareness to the importance of having life insurance for your family. Read more about the movement and follow the discussion on Twitter (hashtag #LifeAware).

About the author: Carrie Smith is the financial artist and editor behind Careful Cents. She helps creative entrepreneurs make a living with their creations, and reach financial freedom through systems and financial organization. She’s been featured in The Huffington Post, Glamour Magazine, Kiplinger Finance and several other business websites. In May 2013 she quit her full-time accounting job to pursue entrepreneurship and blogging. You can find her on Twitter or Instagram @carefulcents.

Comments on this entry are closed.

  • Brent Pittman August 22, 2012, 11:23 am

    I hadn’t heard that 15-20x income idea before. Makes me think and hopeful for my income to justify that much insurance!

  • Modest Money August 22, 2012, 1:12 pm

    Sorry but I couldn’t see very many situations where you would need 15-20 times your annual salary for life insurance benefits. That just sounds like an insurance salesman trying to convince someone to pay higher premiums. Even if it was a family where only one partner was working, sometime in those next 10 years the remaining spouse could find some kind of job. A family doesn’t need to win the lottery when someone dies. In my case I’m young and single with enough assets to cover funeral costs. So I won’t be getting life insurance until I have kids.

    • Carrie Smith August 22, 2012, 1:25 pm

      You make a good point. What I think Jeff means is if you base your 10x annual income calculation on your income of say $25,000 (if you’re in your twenties just starting a family), it won’t be enough for your loved ones to comfortably live on. Especially with things like inflation and increased lifestyle costs.

      I know you’re thinking the other spouse could get a job within plenty of time, but how difficult will it be for a single parent to work while raising several children? I know people do this all the time, but it will be so much easier if the family was already set up for the future – and living off the investment the insurance payment brings.

      I too, am single with no dependents, but I still have life insurance to cover any other unexpected costs. Of course I don’t want my family to win the lottery, but I don’t want my financial situation to be a burden after I’m gone. Thanks for your input!

      • Modest Money August 22, 2012, 1:33 pm

        Maybe I just expect more parents to be awesome like my mom was. She raised me and my sister as a single parent and did very well. It is only in a child’s early years that they would feel obligated to be a stay at home parent. Several children would be a different story though. I was thinking more of 1 or 2 children. Also I don’t think inflation comes into play too much because when the benefactor gets the insurance payout they can invest the money to milk some additional income from that total.

        • Debt Free Teen August 22, 2012, 1:59 pm

          But also consider that a mom that has been out of the workforce for awhile does not have the same earning potential. We have a family friend and her husband is dieing from lung cancers even though he never smoked. He’s 47. She hasn’t worked in 17 years.

    • Jeff Rose, CFP® August 22, 2012, 2:44 pm

      “That just sounds like an insurance salesman trying to convince someone to pay higher premiums” Perhaps, but I don’t think you’ve taken into consideration how inexpensive term insurance is. A healthy 25 year old male will pay $18/mo for a 20 year $250,000 policy. $29/mo for $500,0000.

      Having a spouse that is a stay at home with my 3 boys, I don’t want her to have to find work. If she wants, that’s a different story. But not because she has to pay the bills.

  • Ornella @ Moneylicious August 22, 2012, 2:01 pm

    I definitely see what Jeff is talking about. I think all too often life insurance gets a bad rep. There’s even universal policies. I actually have a variable universal life insurance policy that I use as apart of my long term financial strategy. And it’s working great. But then again, I’ve been in this industry for over seven years and know exactly where my premiums are going—costs and the subaccounts.
    You don’t want one to win the lottery off your death (what kind of society would we become), but it’s best to not leave a burden on the family. Life insurance is used for so much more than to protect loved one. But the main purpose of life insurance is to protect and provide a peace of mind.
    I really like your post! :-)

  • Peter August 22, 2012, 3:05 pm

    I do think it’s a good idea for most folks to get insurance, although what kind and when to get it is the part that is up for debate. Personally I now have a term policy to cover me in case I die to cover my wife and son’s expenses. It should cover about 10x my annual income, although I’m looking to possibly get a bit more.

    I do think there might be times that someone younger and without dependents may want to get insurance. For example, the younger and healthier you are when you buy, the better you can expect the rates to be. Not only that, you never know when you might get sick or be diagnosed with something, and having a pre-existing illness could preclude you from getting good rates on insurance later on. Better to have the insurance in place and paid for already.

    • Carrie Smith August 23, 2012, 11:17 am

      That’s a really good point @e9875bb06ae5f8fabb6fec4e8e209a59:disqus The younger you are the better rate you can lock in for when you’re older. Definitely something to consider, even for us single folks or Dinks!

  • Robb August 22, 2012, 7:03 pm

    I think the reason so many Whole Life policies are sold is because they are a good deal for the person selling them and a lot of people don’t know they are a scam so they just go along with it. I had an argument with some family members over this and they were like “Well this guy says they are good!” well of course he does, he is benefiting from their sale!

    Also I think it is good you’ve hit on this because I think a lot of people under the age of 30 seem to think they are immortal beings who will just keep existing indefinitely – I know I sure thought that and then one day you wake up and realize you are a mortal being and it is really a wake up call.

  • Jen August 23, 2012, 11:19 pm

    Great post! I definitely feel a peace of mind knowing that my husband and I both have our own policies + policies provided through our jobs. We found a financial planner that we trusted and purchased our policies through him. We lucked out and got great rates because we pursued the policies in our 20′s with no health problems.