<< Understanding Basic Insurance Needs

Who Needs Life Insurance?

If you have people that depend on you financially (e.g. spouse, children, or possibly parents), you need life insurance. Life insurance comes in two main types, “Term” and “Permanent.” 

Term Life Insurance

Term life insurance lasts for a specified term (usually between 10 and 30 years), typically has a fixed monthly or semi-annual premium, and provides a lump sum benefit to your beneficiaries when you die. This lump sum benefit is typically tax free. Term insurance is the most common type of life insurance, is reasonably priced (although your health and lifestyle can affect this), and according to experts is the right choice for most people.

If you have anyone that relies on you financially, you need life insurance.

Permanent Life Insurance

Permanent life insurance lasts for the entire duration of an individual’s life as long as the premiums are paid. It consists of both a death benefit and a “cash benefit.” The cash benefit is essentially a savings vehicle. Typically, part of your premiums are invested and you can receive some of the returns if you cancel your policy. Sometimes you can even borrow against your invested assets. Permanent life insurance policies are more complex than term policies and on average your premiums will be 6-10x more expensive. 

There are reasons that both types of insurance can be good depending on your situation. But Term life insurance is much more common due to lower premiums. Additionally, the invested cash value you can get from a permanent life insurance policy is unlikely to be the best way to invest those dollars. In other words the standard recommendation is to buy cheap term life insurance and invest the difference in the premium prices in other ways if you’re able to.

The amount of insurance you need is often calculated at 10x your annual salary. Some people get a little more detailed and will add in things like debt owed and higher education expenses that they plan provide for their children. But some version of the “10x salary + other expenses” is a good rule of thumb to estimate how much life insurance you need.