In discussions of life insurance, sometimes it’s important to stick to the basics. In this case, the basics would be who needs life insurance anyway? This raises subsequent concerns, like who is eligible for life insurance, and what do you do if you “need” it and can’t get it? So let’s talk about it.
Who Needs Life Insurance?
We like to think of life insurance as a “want” rather than a “need,” simply because we think it’s so valuable that everyone should just want to have it. Yet we recognize that there are circumstances in which people may consider life insurance to be something they need. So who needs life insurance?
To put it in perspective, life insurance is a product that pays out when you die. To put it bluntly, the idea is that the people you leave behind will still need you, and since they can’t have you, your income is the next best thing. This “windfall” serves many purposes, though the primary purpose is to alleviate the loss of the insured’s future earnings.
Why Do You Need Life Insurance?
The reason you need life insurance is because death is a guaranteed event. Every person on the planet is guaranteed to die someday. We just don’t know when. And sometimes, the timing can be inconvenient. And if you’re too hung up on what happens when you die, it’s hard to really live.
Life insurance alleviates that fear of “when,” by helping people be confident that regardless, the people and things that matter to them will be taken care of. That’s really what insurance is: peace of mind.
So who “needs” life insurance? Here are some scenarios of people who may feel most inclined to have life insurance:
- A newly married couple who wants to make sure their spouse will have financial stability in the event of their death.
- New parents who are thinking about their children’s future should they not be there to see it.
- A young person who wants to use whole life insurance for savings, and wants to lock in at their current age and health status.
- Someone who wants to help their family establish a generational wealth-building tool.
- A business owner who has an employee who is absolutely essential to business operations, and should something happen to them, it would be a significant cost to hire and train someone new.
- A grandparent who finds that they are ineligible to open a new life insurance policy, so they buy one on their child or grandchild instead.
Who Does Not Need Life Insurance?
As we said—we think everyone should want life insurance, that’s how good it is. And really, everyone can benefit from life insurance. However, there may be some instances where a person doesn’t need life insurance because they’re not ready.
For example, a person who isn’t in the habit of saving money and is living paycheck to paycheck probably does not need life insurance immediately. First, it would be prudent for them to establish a savings habit and demonstrate that ability over a year. This would show that they’re capable of good money habits, and that they have the appropriate cash flow to buy a policy.
Some people may also say that a young, single person does not need life insurance. While they may not have a spouse or kids to care for in the event of their death, that doesn’t mean they don’t have a “need.” For example, that single person may still have some debt that would fall to their parents if they passed away. The child may not desire a policy, yet the parents might choose to buy one on their child so that they would be protected in that scenario. They’d be funding it, and they would also receive the death benefit should their child pass.
This child may also decide that he has a desire to build some capital. He may not feel that he “needs” the death benefit, yet he WANTS the cash value and knows it takes time to build up. So he starts a policy in his 20s that he can begin seriously leveraging in his 30s, if not sooner.
When Should You Get Life Insurance?
By now, maybe you have decided whether or not you want (or need) to have life insurance. The question becomes, when should you get life insurance? To this, we’d recommend as soon as possible.
There are several reasons that it’s prudent to get life insurance as soon as you’re able to. If you’re interested in the cash value portion, it takes time to grow. So if you want to use life insurance like a savings account, you have to be thinking in the long term. The sooner you start accumulating cash, the sooner you’ll be in a position to use it.
Another reason to get a policy as soon as possible is to lock in your current age and health. When you apply for any life insurance policy, your age factors into the cost of your insurance. And with whole life insurance in particular, so does your health. The better health you have, the better premium you can get relative to your death benefit.
It’s also possible that you may not be eligible for insurance at all, based on your health. By purchasing a policy when you know you’re in good health, you lock in that policy for life. If your health changes, you may not be able to purchase a new policy, yet any permanent policies you already have will remain unaffected. This is why it’s such a good idea to get that guaranteed insurance in place when you know you are eligible.
What Type of Life Insurance Do I Need?
There are several types of life insurance available to you: term life insurance, whole life insurance, and universal life insurance. Of the three, whole life and universal life are considered permanent (although we’ve found that universal life isn’t truly permanent).
Term Life Insurance
Term life insurance is temporary life insurance. It can be structured a few different ways, though generally you either purchase it for a term of time (10, 20, or 30 years), or you buy annually renewable term insurance.
This insurance is the cheapest insurance, because it’s pure death benefit (no cash value), and it’s only guaranteed during the term that you pay for it. For most people, their term insurance lapses without them using it. While longevity is always good news, this means that for most people, term insurance is pure cost. There’s no “return” on the investment of term insurance.
Even so, we love term insurance for the peace of mind it provides to people. Accidents do happen, so it’s better to be prepared than not. For many adults, simply knowing there’s coverage allows them to live life more freely, without those lingering fears of “what if.”
Term insurance is also great for helping people reach their full Human Life Value—or the maximum amount of insurance benefit they’re entitled to based on income. Many people are eligible for much more insurance than they have the cash flow for, so they buy as much whole life insurance as possible and supplement the rest with term insurance.
Permanent Life Insurance
Next, you have permanent insurance—whole life and universal life.
Whole life insurance is the original, time-tested, permanent life insurance option. Whole life insurance is guaranteed to last for your whole life. This means that whether you died the day after buying your policy, or 80 years later, your loved ones will receive a death benefit. In fact, if you live to age 121 (endowment age), the insurance company will pay the death benefit directly to you.
Because whole life insurance is permanent, it costs more. After all, the company is guaranteeing that they will pay you or your loved ones a lot of money. The trade-off to this cost is that the insurance company will allow you to access some of your death benefit while you’re alive. This is the cash value component. It’s like building equity in your death benefit—paying premiums raises your equity. In addition, your cash value earns interest and dividends. And, you get to use this cash value at any time, for any reason, via the policy loan function.
While universal life insurance is touted as permanent, the results speak for themselves. A quick Google search of universal life insurance lawsuits will show that many people’s policies implode because they’ve been underfunded and lost money. This is because universal life policies are correlated to the stock market, and are subject to the same whims. These policies simply do not have the same contractual guarantees as whole life insurance.
How Much Life Insurance Should You Buy?
If you want to know how much life insurance do you need, the answer is going to be highly personalized. We mentioned Human Life Value earlier, which is a calculation that helps you determine the maximum amount of insurance you’re generally entitled to. In fact, insurance companies will not issue you more insurance than this number.
The simple answer to this question would be: as much as you can get. However, many people don’t have the cash flow to insure up to their full HLV solely with whole life. That’s why we often recommend supplementing with term insurance. And if you think you may want to boost your whole life eventually, you can even buy convertible term insurance.
The question of how much whole life insurance then comes down to your personal cash flow. How much money do you normally put away for savings? This number can be used to determine how much premium you’re comfortable paying, and you can reverse engineer a death benefit from there. This is a good place to start for most people because it doesn’t require a change in behavior—you’re just directing that cash flow into a different place.
And if you use a tool like Currence, you can actually work on increasing your savings capability and cash flow over time, which can be used for new policies in the future.
Conclusion: Do I Need Life Insurance?
Hopefully, you’ve identified that because everyone dies, technically everyone “needs” life insurance. The real question is, do you want life insurance? It’s your desire for life insurance that is really going to get you into gear to purchase it.
If you want life insurance, and would like to know how much insurance you’re entitled to, we’d be more than happy to help. Based on your personal economy and what you want from your money, we can help you start your insurance journey on the right foot. Book with us today, or email any questions you have to welcome@prosperitythinkers.com.
