Do You Need Life Insurance? How Much Is Enough?

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Murder mysteries might suggest life insurance policies are mostly taken out with nefarious intent, but an insurance agent will be quick to tell you that buying life insurance is an act of love.

There are different types of life insurance, which pays named beneficiaries money if the insured person dies. The two most common are term life and whole life. Term life policies last 10 to 30 years, have a set monthly premium that cannot increase, and must be rebought or in some cases converted to a whole life policy at the end of the term; whole or permanent life insurance policies are good for as long as the premiums are paid.

Do you need life insurance?

Life insurance is not for everyone. Someone who does not have financial dependents generally does not need a policy. Those with a large financial reserve that can take care of expenses and dependents in the event of their death may also see little value in having a policy. Older people, including those with children who are already financially stable, may consider passing on life insurance as well. But a policy could be worthwhile in case someone develops a debilitating or chronic illness, as treatment can drain savings quickly.

People with a significant other or family members who rely on them will likely want insurance. The focus is sometimes on the breadwinner in the family, but the loss of a stay-at-home partner can leave a family with a significant financial burden, too. Single parents or grandparents who take care of a child should also consider a policy. Even couples without children may want a policy if their lifestyle is dependent on both incomes.

In the end, a life insurance policy is not so much for the insured person (although it can provide peace of mind) as it is for those who depend financially on the insured.

How do you calculate coverage needs?

A policy can be relatively cheap; even $500,000 policies can cost less than auto insurance in some cases. There are several expected costs to consider.

  • Current Debts. The policy should cover the insured person's current debts, such as a mortgage, car loan, student loans, or credit card balances.
  • Future Contributions. Consider a married couple with two children. They want a policy that will cover them for the next 30 years while their children grow up. One parent stays at home and the other works full time. The policy should cover the future earnings of the partner who works outside the home (salary plus potential raises, multiplied by 30 years). A second policy should cover the stay-at-home parent and cost to replace that person's contribution (the cost of child care, tutoring services, a housekeeper, and so on).
  • Large Future Expenses. As parents, the couple may want to help their children pay for college, buy a first car, or leave enough money for the surviving spouse to take an unpaid break from work to grieve. Future expenses should also include the cost of the funeral.

Combine the above and that is the approximate amount of coverage a life insurance policy should include. Take into consideration current savings that can offset some of those costs. One thing simplifies the calculations: The policy payout is tax free.

Make things simple by letting an online calculator do the work. Try ones from SmartAsset, Bankrate, and Prudential.

How do you save on premiums?

It's important to shop around before buying a policy. Be wary, though, of sharing information with a website that asks only for a name and contact information. Often this input is sold to many agents or brokers, which can result in a flooded inbox and unwanted phone solicitations.

Using brokers who work with multiple companies can be a good idea; they can use one set of information to get competing quotes from multiple insurers (and policies bought through a broker often cost the same as identical policies bought directly). Jeremy Hallett, chief executive and co-founder of online life insurance broker Quotacy.com, points out that not only do companies calculate life expectancy differently, but they may also consider specific events or lifestyles differently.

For example, smokers can pay premiums that are up to 200 percent higher than non-smokers, Some insurance companies lump cigar, e-cigarette, and chewing tobacco users into the same category as regular cigarette smokers, but some do not. A drunken-driving record can also increase premium rates, but some insurers may not raise rates for a first incident.

Life insurance often requires a medical exam (non-exam options exist, but the rates may be higher or limits lower) and rates are lowest for the healthiest people. Eating well and exercising regularly can go a long way, but making a last-minute effort does not usually cut it. Hallett says many insurers count only half the weight lost over the past year, assuming the other half is likely to return.

Sometimes there are other discounts available, such as a multi-line discount for policyholders with other insurance products from the company. The discount does not guarantee a lower total price than buying life insurance from a different company, though.

Do not set it and forget it.

Ideally, a life insurance policy will last for years without ever being used -- but the policy should be checked every year or two. Make sure coverage is sufficient, and change things as need be by canceling and rebuying a new policy or adding a supplementary policy on top of the existing one.

Changes in health can also prompt a new look at the policy. Increased health might mean a new policy will be cheaper. After developing a chronic condition, converting a term policy to a whole life policy may be a good idea, if it is an option.

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