Why you need life insurance. Or do you?


Do you really have to get life insurance? At the Guardian Life Insurance Company of America, we obviously try to encourage people to get coverage, but we also recognize that not everyone needs life insurance.

Generally speaking, life insurance is most useful (and plays an important societal role) as a way to help protect families that would suffer financially when a breadwinner dies. A policy can serve other functions as well, such as helping to build long-term wealth. Still, most people think of and use it for this primary purpose: 9 in 10 working Americans believe it is important for a family's primary wage earner to own life insurance.1 But not everyone is a primary wage earner, so we'll start with a frank assessment of who doesn't need a policy and who does. If you decide you're in the latter group, we'll also help you understand what kind and how much insurance to consider getting – because a lot of people who need protection have less than they should.1

Who doesn't need life insurance?

Generally, There are two kinds of people that may have little or no need for a policy: 

1. Younger people with no family commitments or financial obligations

Suppose you're a single young adult with no debt, and no plans to find a partner and start a household any time soon. Assuming you have moderate income (like most people starting out), then life insurance is probably near the bottom of your financial priorities – and rightfully so. People at this point in their lives don't currently need to be concerned about providing for a spouse or children and are more likely to be worried about being a financial burden to their parents. When young adults in this situation die unexpectedly, it is undeniably tragic – but unlikely to put their loved ones' financial well-being at risk. 

There are, however, situations where unattached young adults might want to be covered, even if they don't have financial dependents to name as their beneficiaries:

  • If you have significant student loans or other debts your parents would be responsible for if you died, consider getting temporary term insurance with enough coverage to settle those obligations. (In this situation, you'd name your cosigner (s) as the beneficiary.)
  • If you're fairly certain that you will get married and have kids one day – even if it's a decade away – you may want to buy insurance while you're young, and rates are most affordable.  Permanent "whole life" and "universal life" policies provide lifetime protection while also building cash value that grows in a tax-advantaged way and can be used while you're alive. 2,3,4,5
  • If you're a high earner who maxes out your 401(k) contributions, permanent policies can also be attractive because the cash value portion can work as a tax-advantaged way to supplement your income in retirement.

2. Older people with enough income and assets to cover their retirement living expenses

Perhaps you're at or near retirement, no longer have to worry about providing for your kids, and have little or no mortgage debt. You're not particularly wealthy, but you're pretty sure you have enough to cover your retirement living costs (as an individual or couple) for as long as needed. If you don't currently have a policy, getting one at this point – for example, to leave a legacy to your heirs – may not be a good idea. Why? Because policies get more costly with age, especially if you have health issues. A policy with a significant death benefit could be prohibitively expensive, and you may not even qualify for a policy. 

However, life insurance coverage can still be beneficial for older people with different kinds of needs. Some scenarios include: 

  • If you don't want to burden your relatives with funeral expenses and related costs, you can take out a "final expense" policy. This type of policy offers a relatively low face amount ($10,000 is a typical payout), which helps keep premiums low. Also, acceptance is typically automatic, with no medical exam or health questions.
  • If you have a special needs child or grandchild, a permanent life insurance policy can be a valuable way to transfer your money to a trust for their care, partly because it helps avoid the time and uncertainty of the probate process.
  • If you have significant wealth and are concerned about estate taxes and how your money will be distributed after you pass away, permanent life insurance can be an important estate planning tool. To cite just one example, if a business asset or real estate is being left to one child, a policy payout can be used to compensate another child.

Note that if you're a senior who purchased a policy years ago, you should consider continuing your protection. If you have a term policy, the rates will be much lower than they would be for a new policy; and if you have a permanent policy, you may be able to tap into the policy's cash value to pay your premiums. Finally, if you're thinking of buying life insurance for asset transfer or estate planning purposes, you should consult a trusted tax professional who specializes in estate taxes to ensure the policy meets your specific objectives.

Who needs life insurance?

So far, we've talked about the kinds of people who probably don't have life insurance needs and noted others (such as high-income singles and wealthier seniors) who may find it useful for asset building and estate planning purposes. But there are also some people who should consider being insured for "income replacement" – to replace lost earnings due to premature death.  

1. Wage earners with people who depend on their income

Research shows that 35% of U.S. households would experience adverse financial impact within one month of their family's primary wage earner dying prematurely.2 That's why income replacement is the primary and most important purpose of life insurance. A life insurance policy can pay a valuable, income tax-free death benefit that replaces years of future income in return for premiums that are a fraction of your monthly income. You don't have to be your family's primary wage earner to need protection. Maybe you only contribute a portion of your family's income or provide financial help for other relatives, such as your parents. If people would feel economic hardship without you, they depend on the additional income you provide – so you should consider getting life insurance. 

2. People who have substantial debt 

As discussed, even young adults without other obligations should consider getting enough life insurance to cover their student loans. But a person can also have many different kinds of debt, such as a car, mortgage, business, or personal loan. If there is a cosigner guaranteeing repayment of that loan, the debt will fall to them. And in the case of a home mortgage, even if there is no cosigner, the property can be repossessed. Life insurance can keep you from burdening a loved one with overwhelming debt payments.

3. People who don't have enough savings to cover future obligations

Even if family members aren't dependent on your income, you may have important obligations that you want to ensure are covered. For example, a couple with two salaries and no kids may not need each other's income to maintain their standard of living. However, if they're still saving for retirement, they may want a policy to cover each partner's contribution to their shared nest egg. Joint life insurance policies, which typically cover two spouses, can be a helpful choice for this kind of situation.

4. Business owners

If you are a sole proprietor or partner in a small business, what would happen if you suddenly passed away? Even if it's a family business that your spouse or relatives could run, there is almost sure to be disruption in the form of diverted attention, lost clients, and increased salary costs. If you own a business with partners, they would suddenly have to come up with the money to buy out your share of the business or scramble to find another arrangement. That's why life insurance is typically recommended to help ensure business continuity and/or fund a buy-sell agreement among partners.

If you need to get life insurance, how much?

If you are a primary wage earner, you probably want a death benefit that provides enough replacement income to care for your family until your children reach maturity. There are a few general rules for determining your life insurance need:

1. Human Life Value*

Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future.

In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.

As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:

Age Maximum Life Insurance
18-40 30 times income
41-50 20 times income
51-60 15 times income
61-65 10 times income
66-70 1 times net worth
71-80 1/2 times net worth
81+ case by case

2. Multiply your income by 10 – and add college for each child

This approach is almost as easy to figure out as the first rule, but also helps plan for opportunities like college for your children. How much should you add for each child? College isn’t cheap: you should account for somewhere between $100,000 and $150,000 per child. If you split the difference – and have 2 kids – that’s an extra $250,000.

3. Use the DIME formula

DIME stands for Debt, Income, Mortgage, and Education – the four big factors to consider when making a more detailed estimate of your life insurance needs:

Debt: Total all your debts other than your mortgage. Car payments, credit cards, student loans – even personal obligations such as money you may have borrowed from a sibling to put a down payment on your house. On top of all that, add about $7,000 for funeral expenses.

Income: How much do you make a year? And how many years will your family need that money? It’s a hard question to answer, but a good place to start is determining how many years until your youngest child graduates high school. For example, if you make $50,000 and have nine years until your youngest graduates high school, put down $450,000 for income.

Mortgage: Look at your last statement and get the payoff amount. If you have a second mortgage or HELOC (Home Equity Line of Credit) add that in as well (if you haven’t already included it in the debt section above).

Education: The anticipated cost for sending each of your children to college. As we said before, figure between $100,000 and $150,000 per child.

Add those four factors all up and that’s your number. You can also adjust (i.e., subtract) for any current savings and life insurance you already carry. The DIME method takes a little more work, but it’s also more precise – and you can probably get all the numbers you need in an hour or so by going through your files at home.

Get a quote

The tool above provides a term life insurance quote and is most useful for most people with traditional income replacement needs. For other more complex situations, such as funding a buy-sell agreement among business partners or estate planning, there are no simple "rules of thumb" for determining your need. It is highly dependent on the specifics of your situation, and you should discuss your goals in-depth with a trusted financial professional before you buy life insurance.

Different types of life insurance to suit different kinds of needs

Term life insurance

These policies cover you for a specific period of time, typically between 10 and 30 years. It can be the most cost-effective way to get a substantial payout, so it may be a good choice for people with young children who need a lot of coverage to replace income until they grow up. But protection is temporary, so it doesn't typically work for estate planning and buy-sell agreements. Also, there's no cash value component, so it can't be used to supplement retirement or build wealth.

Whole life insurance

This is a form of permanent insurance designed to last your entire life. While more expensive than term, these policies build cash value, tax-advantaged, at a guaranteed rate of interest. So, you can take out personal loans against it, use the funds to help pay premiums, or even surrender it for money to supplement retirement income in later years. Because it lasts your whole life, it can also fund a long-term business buy-sell agreement or be used as an estate-planning tool.

Universal life insurance

This is another form of permanent life that also builds cash value. But, unlike whole life, it features variable premiums that can be adjusted within a certain range.6,7 This makes it attractive to younger, high-earning professionals and business owners whose income may fluctuate from year to year. Some policies (called variable universal life) also let you take advantage of potential market growth by investing in subaccounts, which are similar to mutual funds.8 These qualities are attractive to people looking to build long-term wealth. VUL also carries greater market risk than the other types of policies previously discussed. Each subaccount investment option is offered by a prospectus, which contains important information such as investment objectives and performance history, and you will need to choose how much of your cash value to invest in each subaccount. There are also management fees and other expenses, which typically range.

Final expense insurance

These policies cover end-of-life costs (such as a funeral plot and burial fees), and insurance company acceptance is typically automatic. The policy is permanent and while premiums are modest, the payout is also minimal –  it's not meant to provide years of financial support to your beneficiaries. Younger, healthier people will typically find greater value in a conventional whole life, universal life, or term policy.

Joint life insurance

These are usually permanent policies that cover two spouses. The insurance company can pay the benefit after the first person dies (e.g., to help support the surviving spouse) or after the second person dies (to provide support for others). These policies are often used for estate planning purposes. 

Think you need a policy? Here are three ways to take the next step.

1. Through your workplace

Work is a good place to start, as your employer may offer life insurance at affordable group rates. If offered, think about applying. Your employer has done the work of finding a policy, and enrolling typically requires little more than signing a form - you may not need a health exam. However, the face amount may be limited, and you might want more financial protection. Fortunately, other options are available.

2. Online

If you can't get covered at work or want to supplement that protection, it's easy to shop for a policy online. Many life insurance companies, including Guardian, make it simple to get term life insurance quotes online, compare rates, and apply for protection.

3. Work with a financial professional

If you're not sure what kind of protection is best for you – term or permanent insurance coverage –  consider working with a financial professional. They can provide knowledgeable insurance information about the options that fit your immediate needs and long-term goals. If you have a financial professional you trust, ask them how much life insurance and what type of policy you should have. Otherwise, Guardian can connect with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide. 

Frequently asked questions about life insurance

Is it important to have life insurance?

If people depend on you for support or would have to pay your debts and other expenses if you were gone, then life insurance is one of the best ways to help ensure those obligations are met. People in other situations can also use it as a tool to build, protect, and pass on wealth to the next generation.

Do I need life insurance if I have a lot of savings?

If you have enough savings to support all the people who depend on you and cover all your monetary commitments, then you may not require life insurance for income replacement if you pass away. However, it could have other uses for you. For example, it could help you build wealth in a stable, tax-advantaged way; if you're concerned about estate planning, it could help you transfer some of your assets more efficiently. It's best to discuss your specific situation with professionals who you trust to provide tax and investment advice.

Do you need a policy if you don't have debt?

It depends on your other obligations and plans for the future. For example, a young parent or couple with no debt should still consider life insurance to provide for their children unless they have enough saved to support them through adulthood.

At what age is life insurance no longer needed?

Regardless of your age, if you are at a point where you have enough income and assets to comfortably support yourself and the people who depend on you financially, you may not require life insurance. For most people with families, this only happens later in life after their children are grown and self-sufficient. In any case, since policies get more expensive with age, the higher premium may not justify the protection offered by a new policy.

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1 Protecting Those We Love: The Role of Life Insurance in Financial Wellness  Guardian Workplace Benefits Study, 7th Annual – Financial Wellness Series, Part 3, Sept 2019

2 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

3 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

4 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

5 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

6 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

7 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

8 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

Park Avenue Securities LLC (PAS) is a wholly owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a registered broker-dealer offering competitive investment products, as well as a registered investment adviser offering financial planning and investment advisory services. PAS is a member of FINRA and SIPC.

Variable insurance products, their underlying investment options, mutual funds and ETFs are sold by prospectus only. Prospectuses contain important information, including fees and expenses. Please read the prospectus carefully before investing or sending money. You should consider the investment objectives, risks, fees and charges of the investment company carefully before investing. Please contact your investment professional or call 888-600-4667 for a prospectus, which contains this and other important information.

Annuities and variable life insurance issued by The Guardian Insurance & Annuity Company, Inc. (GIAC), a Delaware corporation. Individual variable annuities are distributed by PAS. GIAC is a wholly owned subsidiary of Guardian. Guardian, GIAC and PAS are located at 10 Hudson Yards, New York, NY 10001

*The calculation changes based on your age group, so please refer to the chart:

Age Maximum Life Insurance
18-40 30 times income
41-50 20 times income
51-60 15 times income
61-65 10 times income
66-70 1 times net worth
71-80 1/2 times net worth
81+ case by case

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

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