Is Life Insurance Right for You?

The idea behind life insurance is fairly straightforward: in exchange for regular premium payments to a financial institution, your beneficiaries will receive a death benefit if you pass away while the policy is in force. But, how can you tell if life insurance is right for you?

The best way to understand if life insurance is right for you is to determine if you have beneficiaries that will need assistance after you are gone. If that is the case, then purchasing a life insurance policy is probably a good move.

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What Is Life Insurance?

In order to answer whether or not you should purchase a life insurance policy, it is important to unpack exactly what life insurance is. In essence, life insurance is a contract between you and a financial institution.

There are a number of different types of policies, though they can generally be broken down into either term life or whole life insurance.

Term life insurance is the simpler type of arrangement. These contracts are in force for a particular amount of time, most often ranging in increments between 10- to 30-years. If you die during the period when your policy is current, your family will receive a death benefit. However, if you outlive your policy, no death benefit will be paid out.

Whole life insurance is a much more complex contract, which contains multiple components. The first key difference between the two types of policies is that whole life insurance never expires (as long as the premium payments are paid). In other words, your family will receive a death benefit regardless of when you die.

The second major distinction between these two types of policies is that whole life insurance contains a cash value. The cash value is a monetary account which grows in time at a pre-determined rate. It is considered a living benefit, and the owner of the whole life insurance policy can borrow from these monies. However, any monies borrowed will likely decrease the eventual death payment.

The cash value also has a residual store of value. If you decide to end your life insurance policy, you can keep the money that has accumulated in your cash value (minus any cancellation fees and other penalties).

Because of these additional benefits, whole life insurance policies are significantly more expensive than term life insurance policies.

Why Purchase Life Insurance?

The reason to purchase term life insurance is to help your family members transition to a life when you are no longer around. For most, this means replacing the monetary value that you contribute towards your household.

Term life insurance will allow you to accomplish this goal. There are multiple ways to determine the size of the death benefit that you are looking to leave your family.

One such approach is the DIME method, whereby you will combine your Debts, Income, Mortgage, and expected Education expenses to determine the amount your family will need going forward. Or, you could use the 10X rule, whereby you simply take your income and multiply it by a factor of 10.

Though in theory the purpose of whole life insurance is the same as term life insurance, there are some other factors at play. Those who elect to purchase whole life insurance are often motivated by more than income replacement, such as supporting a special needs dependent who will always need financial support.

Who Needs Life Insurance?

For those needing to support beneficiaries, life insurance is generally a recommended expense. Term life insurance is a relatively cheap way to make certain that your monetary value will be replaced during the time period when your family has an acute need for your financial contributions.

On the other hand, whole life insurance is a much more expensive way to ensure that your family will receive a death benefit. The motivations for pursuing this type of policy generally extend beyond simple income replacement.

There could be reasons to purchase a whole life policy, including the need to ensure the care for a dependent who will need lifelong care. However, purchasing a much cheaper term life policy that eventually expires—while investing the delta saved into other funds—could likely provide greater financial benefits than going with a whole life insurance policy.

As always, it is recommended to speak with a licensed professional to understand the best path for you to take in order to ensure the care of your family.

Conclusion: Balancing Current and Future Needs

The purpose of life insurance is to ensure the care of your family after you are no longer around to do so. Plain and simple.

Term life insurance is designed to provide a cheaper alternative for income and value replacement. Whole life is a more comprehensive policy, but it is also more expensive.

None of us have unlimited funds, and therefore we must constantly seek to balance our current needs with future expenses. Balancing our budget in the present day should not be sacrificed in the service of an unknown future. Your responsibility—if you have children and/or other beneficiaries—is to make sure that their needs are taken care of both now and going forward.

Life insurance—especially term insurance—is geared to do just that.

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