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 believe that having coverage is beneficial, 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 also serve other functions, such as helping build long-term wealth. 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 many people who need protection have less than they should.¹

• Who doesn't need life insurance?

• Who needs life insurance?

• When should I get life insurance?

• What are the different types of life insurance?

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 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 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 reasonably confident 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-efficient 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-efficient 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. For example, if a business asset or real estate is being left to one child, a policy payout can be used to compensate another child. A life insurance death benefit can also help to cover estate taxes and funeral expenses.

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 some people 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 4 in 10 households say they would experience financial hardship within six months if a wage-earner died.¹ 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 practical choice for this 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 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. Life insurance is typically recommended to help ensure business continuity and/or fund a buy-sell agreement among partners.

When should I get life insurance?

Many people don’t have a life insurance policy but plan to get coverage at some point. So, when is the best time to get coverage – or at the very least, reconsider your coverage needs? There are two ways to look at it:

Get coverage when your life changes

Life circumstances change. Sometimes the changes are expected, like graduating college and looking for a job. Other times, the changes are a little more surprising, like when the doctor says, “Congratulations, you’re expecting triplets!”. As your obligations change, and more people depend on you – whether a spouse, child, business partner, or employees – that’s a necessary time to consider getting life insurance – or adding to whatever protection you already have.

Get coverage as soon as possible

One enduring truth about life insurance is the fact that the older you get, the more you pay for coverage. This is because older people are simply riskier to insure because they have fewer years of life expectancy. Also, the longer you wait to get coverage, the more likely you are to develop a health issue, such as high blood pressure or diabetes, that can raise your cost of coverage or even disqualify you from getting certain kinds of policies.

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*

Based on the value of your future earnings, a simple way to estimate this is to get 30X your income between the ages of 18 and 40; 20X income for age 41-50; 15X income for age 51-60; and 10X income for age 61-65. After age 65, coverage is based on net worth rather than income. See below for a more detailed explanation of the philosophy behind this method and other factors that may be considered in the calculation.

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

This approach is a bit simpler but still helps plan for opportunities like college tuition for your children. How much coverage 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 two kids – that’s an extra $250,000.

3. Use the DIME formula

This method considers future expenses in addition to future earnings. DIME stands for Debt, Income, Mortgage, and Education – four significant factors to consider when making a 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 final expenses.

• Income: How much do you make a year? And how many years will your family need that money? It’s a tricky 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 payments: 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 (if you haven’t already included it in the debt section above).

• Education: Anticipated college costs for each of your children. As we said, figure between $100,000 and $150,000 per child.
  Add those four factors all up and that’s your number. Of course, you can also adjust (i.e., subtract) for any current savings and life insurance you already carry.

• The Human Life Value Estimation method: Some financial professionals 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 life insurance you purchase depends on many factors. That’s why it’s a good idea to talk to a Financial Professional when buying life insurance.

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

Before purchasing a life insurance policy, it’s crucial to understand your policy options. This includes understanding the different types of life insurance policies. It’s also essential to consider the coverage amount, premium rate, and if the policy has a cash value component. By understanding your policy options, you can make an informed decision when choosing a policy that meets your needs.

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, shopping for a policy online is easy. 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 unsure 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 you with a financial professional who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide.