Do I need life insurance?
“Do I really need life insurance? With bills piling up left and right I can’t even begin to think about another monthly or yearly payment. I just can’t deal with one more bill right now.”
The short answer is “no”, you don’t need to worry about life insurance - unless someone else is financially dependent on you. Does anyone - usually a child or a spouse or some other adult dependent - depend on you for their financial survival? If so, you need life insurance. Don’t brush this aside. You owe it to that person to figure this out.
You might have a couple questions:
“What kind of life insurance should I get?” You should get term life insurance. You’ll pay a fixed amount every year for 10 or 20 years and then the policy expires. The other option is whole life insurance which is a combination of investing and insurance.
My opinion: if you need insurance, buy insurance; if you need to save some money for retirement, put some money in an IRA. Don’t try to meet both needs at once by buying whole life insurance.
“How much insurance do I need?” Well, it depends. If your kids are nearly grown, almost launched, you don’t need much. Maybe a few hundred thousand would be enough to get them through college and out the door. If your kids are young, you should be probably be thinking a million or more, maybe two.
As a high-level example, say you make $85,000 per year after taxes and you have a stay-at-home spouse with a toddler and an infant. Your spouse will need your $85,000 every year for the next twenty years. A life insurance payout of $1.2 million invested at 4% would pay your spouse $85,000 per year for 20 years. So if this is your situation you might want to think about getting a $1.2 million term life insurance policy.
That’s a very simplistic analysis. It doesn’t account for the size of your mortgage or inflation or your spouse’s possible future employment income or your spouse’s chances of remarrying or your kids’ desire to go to college, but it gives you a ballpark number to start with.
“How much will it cost?” Depends on your age and overall health. Smokers pay more. It will likely be less than your cable TV bill. Do a quick google search to get a rough idea.
That’s my take on life insurance. It is a vast, complicated industry, but in my opinion that’s all the average person needs to know.
(Disclaimer: I’m not a Certified Financial Planner. If you want another opinion about life insurance, go talk to a professional. But if she recommends whole life, ask about her commission.)