Do I need life insurance?
E*TRADE from Morgan Stanley09/06/23
Summary: If you are wondering when you may need life insurance, we dig into several factors that can help you decide.
What is the purpose of life insurance?
Like other types of insurance, life insurance may provide financial protection in the case of an unexpected event. As a policyholder, you pay premiums to the life insurance company in exchange for the promise of a “death benefit”1 to be paid out to your chosen beneficiaries if you die (assuming you are the insured) while the life insurance policy is in place.
Generally, life insurance policyholders intend for the death benefit to help cover their beneficiaries’ financial needs in the event of their passing. If you have dependents who rely on you financially, you may want to consider life insurance.
When is life insurance generally purchased?
There are several life stages that might prompt you to purchase life insurance or review the policies you have in order to determine if you have enough coverage. Some common examples include:
- You have various loans: Taking out a mortgage or business loan can sometimes coincide with purchasing a life insurance policy. Your named beneficiaries can use the proceeds of the life insurance to help pay off the mortgage or business loans you may have.
- Experiencing a major life change: Marriage, the birth or adoption of children, or the loss of a loved one, often means that more people are depending on you. Whenever your number of dependents increases or your marital status changes, it may be a good idea to purchase or update your life insurance to help make sure your family will be financially prepared if something were to happen to you.
- If you’ve chosen to stay home and care for loved ones, that’s also a good opportunity to consider a life insurance policy. The cost to replace the care that you may provide–whether it’s childcare, taking care of a home, or even caregiving for a parent–could be covered by the benefits from a policy.
- Changing a career or income: Many people rely on their workplace for their life insurance policy. Unfortunately, that may mean your policy ends when your employment does. Additionally, a prolonged unemployment could potentially draw down your savings, which could affect your family's finances if something were to happen to you before you rebuild your financial safety net. Though money may be tight after a job change, job loss, or reduction in income, this can be an important time to consider your life insurance coverage.
Though money may be tight after a job change, job loss, or reduction in income, this can be an important time to consider your life insurance coverage.
Factors to consider when buying life insurance
Life insurance is not a one-size-fits-all product, so there are several important factors to consider in determining which product and policy fits your circumstances including:
- Term vs. permanent life insurance: There are two basic types of life insurance: term and permanent and they serve different purposes.
- Term life insurance is only valid for a certain amount of time, and your named beneficiaries will not receive a benefit if you outlive the term. There are two types of term life insurance: level and decreasing. With a decreasing-term policy, you also purchase insurance for a set period, but the coverage amount diminishes over the term. It’s intended to cover financial obligations that decrease over time, like a business loan or mortgage. With a level-term policy, your premiums and death benefit stay the same for the entire length of the term.
- Permanent life insurance pays out no matter how old you are when you die, 2 and you may also be able to build cash value in the policy that you can access during your life. This type of policy may make sense for those with more complicated financial needs or those interested in leaving a financial legacy to heirs. While permanent life insurance is more expensive, it can be more flexible as a financial tool.
- Length of time you need coverage: Term life insurance policies can be as short as one year and as long as 30. Depending on your beneficiaries' financial needs, you can determine how long you might need coverage to protect them.
- Employer-sponsored coverage: Many employers offer life insurance in their benefits package. Generally, this type of coverage is affordable, but it often has low coverage limits. If your employer does offer life insurance, maximizing your employer-sponsored coverage and purchasing an additional policy on your own can be a savvy way to get all the coverage you need.
The bottom line
Since life insurance is intended to take care of anyone relying on you or your income, it’s a good practice to periodically review your coverage when there are any changes to your debts, life stage or home life, or your income.