Navigating the path to financial security often involves evaluating various strategies and tools, with life insurance being a key component for many. At its core, life insurance is designed to protect the goals and plans you’ve worked hard to achieve, such as settling debts and providing for a comfortable retirement for your beneficiaries. It represents a commitment to your loved ones’ financial well-being, ensuring they remain secure in your absence.

Identifying who needs life insurance is an essential first step. According to a recent study by LIMRA and Life Happens, while 51 percent of Americans hold at least one life insurance policy, 22 percent feel their coverage is insufficient. Additionally, 30 percent of those without insurance believe they need it, underscoring a notable gap in coverage. This highlights the need for a thorough evaluation of your life insurance requirements.

Our Bankrate insurance editorial team is here to clarify life insurance concepts, helping you understand how it fits into your financial strategy and identifying scenarios where it can be most beneficial.

Do I need life insurance?

Whether life insurance is right for you depends on your unique financial goals and personal circumstances. Consider exploring life insurance if you relate to any of the following scenarios:

  • If your partner relies on your income: Regardless of whether you have children, if your spouse depends on your salary, it’s important to assess their financial situation in the event of your passing. Consider whether they would need support to cover daily expenses or if they might need to seek employment.
  • If you have young children: With the cost of raising a child now averaging $310,605 from birth to age 17, according to a Brookings study, life insurance can help cover expenses such as food, shelter, clothing, and education if you’re no longer around.
  • If you contribute to family expenses like a mortgage or college tuition: If you help with mortgage payments or fund your children’s college education, a life insurance policy can provide financial support for your family, ensuring they can manage these costs if you pass away.
  • If your family might struggle with funeral expenses: The median cost of a funeral in the U.S. is $7,848. If your family might have difficulty covering these costs, a life insurance policy can help relieve them from financial burdens during a difficult time.
  • If you leave behind debt: Debts could be transferred to your spouse or joint account holders upon your death. Life insurance can help protect your loved ones from inheriting your financial obligations.
  • If your business partners or employees rely on you: If your business depends on your leadership or if you have partners who would struggle without you, life insurance can provide financial stability for your business.
  • If you support a special needs dependent: If you financially support a dependent with special needs or disabilities, life insurance can ensure they continue to receive the necessary financial support after you’re gone.

What type of life insurance do I need?

Understanding whether life insurance fits into your financial strategy is just the start. Once you recognize its potential benefits, the next crucial step is to determine the type of life insurance that best suits your needs. This decision depends on various factors, including your current financial obligations, future goals, and the needs of your dependents.

For those supporting a family, especially if you have young children or a partner who relies on your income, a term life insurance policy might be a practical choice. Term life insurance is typically more affordable and can be set to cover the period when you’re most financially vulnerable.

On the other hand, if your financial planning includes long-term goals such as estate planning or charitable giving, a permanent life insurance policy—like whole life or universal life—may be more suitable. While these policies generally come with higher premiums, they offer lifelong coverage and can build cash value over time.

When choosing life insurance, focus on selecting the type that provides the most peace of mind for your specific situation. Consulting with a financial advisor can offer personalized guidance to help you make the best decision for your needs.

Who needs life insurance the most?

If you’re considering who might benefit most from life insurance, this list provides some key scenarios. While not comprehensive, it highlights situations where life insurance could be particularly advantageous. If any of these situations apply to you, it may be a good idea to discuss your options with an insurance agent.

1. Parents of young children

As a parent, ensuring the well-being and future of your children is a top priority. Life insurance can offer vital protection, helping to meet your children’s needs even in your absence. It can cover daily living expenses such as food, clothing, and education, providing your family with financial stability during difficult times.

Moreover, life insurance can help fund your children’s education, enabling them to pursue college without the worry of student debt. By securing a life insurance policy, you can have peace of mind knowing that your children will have the resources they need to thrive, no matter what the future holds.

2. Stay-at-home parents

In today’s economy, where inflation is on the rise, multi-earner households are increasingly common. However, some families still rely on one parent to work while the other manages the home and children.

Couples in this situation might buy life insurance based on the income of the working spouse, but they often overlook the value of the stay-at-home spouse. The cost of childcare, meal preparation, transportation, and household chores can be significant. Therefore, even in single-income households, it’s generally wise to consider a life insurance policy for the stay-at-home spouse to cover these essential contributions.

3. Small business owners

Entrepreneurs often see themselves as self-reliant, but after achieving success, it’s crucial to recognize that your team now depends on you. This makes life insurance an important consideration. Think about the impact your loss could have on your partners and employees. Additionally, a permanent life insurance policy can offer the benefit of borrowing against its cash value for business needs, such as funding a retirement plan for employees.

Life insurance can also enhance business partnerships by covering key individuals or supporting a buy-sell agreement. You and your partners might consider purchasing a policy that provides a payout in the event of a key person’s death. These funds could be used to buy out the deceased partner’s share of the business at a pre-determined price or to manage the financial impact of losing a valuable employee.

4. Couples without children

Although life insurance is often associated with families with children, couples without children also have strong reasons to consider it. If one partner depends on the other for financial support, a life insurance policy can prevent the surviving partner from facing financial hardship. It can help cover living expenses, settle shared debts, or maintain their standard of living.

Life insurance also provides a way to create a lasting legacy. You can designate the payout to support charitable causes, assist nieces, nephews, or other loved ones, or cover estate taxes and final expenses. This ensures that your partner or other beneficiaries are not burdened with these costs.

5. Caretakers

Singles often overlook life insurance, thinking it’s only for those with children. However, if you support a parent or sibling with special needs or a disability, life insurance can ensure their financial needs are met in your absence. Additionally, you don’t have to designate a family member as your beneficiary; you can also choose a church or charity that holds special meaning for you.

6. Empty nesters

Even if your children have grown up and moved out, it’s still worth keeping your life insurance policy. It can help you leave a financial legacy for your heirs, including your children, grandchildren, and beyond. Whole life insurance, in particular, can be a valuable gift to grandchildren, as it remains active as long as premiums are paid. Given rising college tuition costs, life insurance could be a smart way to help with education expenses for future generations.

Additionally, consider the financial needs of your spouse. If they outlive you or if you have retirement plans that might affect their financial stability, life insurance can help maintain their current standard of living. It ensures that your spouse is supported even in your absence.

7. Retirees

Retirement can bring a welcome shift in focus, especially if your home is paid off and you and your spouse have secured retirement income. Yet, life insurance can still play a crucial role in your financial planning. It can help cover estate taxes, funeral expenses, and provide a financial gift to your heirs. The death benefit from a life insurance policy ensures that your legacy is managed according to your wishes and provides support for your loved ones.

How much life insurance do you need?

There are various methods to determine how much life insurance you need, tailored to your specific goals. Bankrate’s life insurance calculator is one tool you can use. Consider calculating the costs you wish to cover, such as funeral expenses and outstanding debts, or estimating the funds needed for your grandchildren’s college education.

If your goal is to replace the income you provide to dependents or business partners, a common approach is to multiply your annual income by ten to twenty years, depending on your budget. Providing ten years’ worth of income can significantly impact the financial security of those who depend on you.

In Conclusion

Selecting the right life insurance policy is crucial for securing the financial future of your loved ones. Whether you’re a young parent aiming to cover your children’s education and living expenses, a small business owner protecting your partners and employees, or a retiree planning to leave a lasting legacy, life insurance can provide essential financial support when it’s needed most. By assessing your unique needs and goals, you can choose a policy that offers both peace of mind and financial stability. It’s not just about safeguarding your assets; it’s about ensuring your family can maintain their standard of living and achieve future financial objectives even in your absence. If you’re unsure about the best approach, consulting with a financial advisor can help you determine the appropriate amount of coverage and tailor a plan to suit your specific situation.