Why Do I Need Life Insurance? 7 Reasons Why It Matters

 

Life insurance is a contract between you and an insurance company. You agree to pay regular premiums to the company, and in return, the company agrees to pay a lump sum known as a death benefit to your beneficiaries after your death.

Your beneficiaries are the people or entities that you name in your policy to receive the death benefit. They can be your spouse, children, relatives, friends, charities, or anyone else you choose. Your beneficiaries can use the money for any purpose they choose, such as paying off debts, covering living expenses, funding education, donating to a cause, etc.

But why do you need life insurance? What are the benefits and advantages of having it? How can it help you and your loved ones in different situations and scenarios?

In this article, we will provide 7 reasons why life insurance matters and why you should get it.

Reason 1: To Protect Your Dependents

One of the most common and important reasons to get life insurance is to protect your dependents, such as your spouse, children, or other loved ones who rely on you financially.

If you die unexpectedly, your dependents may face financial hardship and emotional stress. They may struggle to pay for basic needs, such as food, clothing, shelter, utilities, transportation, etc. They may also have to deal with other expenses, such as debts, taxes, education costs, childcare costs, etc.

Life insurance can provide financial protection and peace of mind for your dependents by paying them a death benefit after your death. This money can help them cover their living expenses, pay off their debts, fund their education, maintain their lifestyle, and achieve their goals.

To determine how much coverage you need for your dependents, you can use various methods or rules of thumb. For example:

• Multiply your income by 10 or 10 plus college costs per child: This method estimates how much income you would earn over your remaining working years and multiplies it by a factor that accounts for inflation and interest. For example, if you are 40 years old and earn $50,000 per year, and you plan to work until 65, you could multiply your annual income by 10 to get $500,000 as your coverage amount. If you have two children who will attend college, you could add another $100,000 per child to get $700,000 as your coverage amount. This is a simple and popular method, but it does not consider your specific expenses or goals.
• Add up your debts and future expenses: This method calculates how much money you owe or anticipate owing for various financial obligations, such as mortgage, credit card debt, car loan, student loan, funeral costs, education costs, etc. For example, if you have $100,000 in debt, $200,000 in mortgage balance, and $100,000 in education costs for your children, you could add these amounts ($400,000) to get your coverage amount. This is a more detailed and customized method, but it may not account for future changes or contingencies.
• Use a life insurance calculator: This method uses an online tool that takes your personal and financial information into account and gives you an immediate result. For example, you can use this life insurance calculator by Forbes Advisor to estimate your life insurance needs. You just need to enter some basic data, such as your annual income, years of replacement income you may need, debts, savings, and other life insurance coverage—and you will get a result instantly. This is a more convenient and accurate method, but it may not capture all the nuances or variables of your situation.

Reason 2: To Pay for Funeral Costs

Another reason to get life insurance is to pay for funeral costs, which can be expensive and burdensome for your family.

According to the National Funeral Directors Association (NFDA), the median cost of a funeral with viewing and burial was $7,640 in 2019. The median cost of a funeral with viewing and cremation was $5,150 in 2019. These costs do not include other expenses, such as cemetery fees, headstones, flowers, obituaries, etc.

Life insurance can help pay for funeral costs by providing a death benefit that can cover these expenses. This can relieve your family from financial stress and allow them to focus on grieving and honoring your memory.

To estimate how much coverage you need for funeral costs, you can use various methods or sources. For example:

• Research online: You can research online how much funeral costs vary depending on your preferences and location. You can use online tools or websites that provide price comparisons or estimates for different funeral services and products. For example, you can use this funeral cost calculator by Parting.com to estimate how much a funeral would cost in your area. You just need to enter some basic information, such as your zip code, type of service, type of disposition, etc.—and you will get a result instantly.
• Plan ahead: You can plan ahead and arrange your funeral in advance with a funeral home or a funeral director. You can choose the type of service, disposition, products, and features that you want and get a written price list or contract. This can help you lock in the current prices and avoid future increases. It can also help you communicate your wishes to your family and avoid conflicts or confusion.
• Compare prices: You can compare prices from different funeral homes or providers and find the best deal for your budget. You can request price lists or quotes from different sources and compare them based on the quality, quantity, and value of the services and products offered. You can also negotiate or ask for discounts if possible.

Reason 3: To Pay Off Debts

A third reason to get life insurance is to pay off debts that you may leave behind, such as mortgage, credit cards, car loans, student loans, etc.

If you die with debts, your creditors may try to collect from your estate or your heirs. This can reduce the value of your estate and your heirs’ inheritance. It can also create legal complications and delays in settling your affairs.

Life insurance can help pay off debts by providing a death benefit that can cover these obligations. This can protect your estate and your heirs from creditors’ claims and allow them to inherit more of your assets.

To determine how much coverage you need to pay off debts, you can use various methods or tools. For example:

• Add up your debts: You can add up all the debts that you owe or anticipate owing at the time of your death. This includes mortgage, credit cards, car loans, student loans, personal loans, medical bills, taxes, etc. You can use online tools or apps that help you track and manage your debts. For example, you can use this debt payoff calculator by NerdWallet to see how much you owe and how long it will take to pay off your debts. You just need to enter some basic information, such as your debt balances, interest rates, minimum payments, etc.—and you will get a result instantly.
• Subtract your assets: You can subtract the assets that you have or anticipate having at the time of your death that can be used to pay off your debts. This includes savings, investments, retirement accounts, life insurance policies, real estate, etc. You can use online tools or apps that help you track and manage your assets. For example, you can use this net worth calculator by Bankrate to see how much you own and how much you owe. You just need to enter some basic information, such as your asset values, debt balances, etc.—and you will get a result instantly.
• Adjust for inflation: You can adjust the amount of coverage you need to pay off debts for inflation. Inflation is the increase in the general level of prices over time. It reduces the purchasing power of money and increases the cost of living. You can use online tools or websites that provide inflation rates or calculators. For example, you can use this inflation calculator by US Inflation Calculator to see how inflation affects the value of money over time. You just need to enter some basic information, such as the amount of money, the start year, and the end year—and you will get a result instantly.

Reason 4: To Replace Your Income

A fourth reason to get life insurance is to replace your income if you are the primary breadwinner or a significant contributor to your household income.

If you die unexpectedly, your family may lose a major source of income that they depend on for their daily needs and future goals. They may have to make drastic changes to their lifestyle and budget. They may also have to postpone or give up their dreams, such as buying a home, traveling the world, retiring comfortably, etc.

Life insurance can help replace your income by providing a death benefit that can act as an income stream for your family. This money can help them maintain their standard of living and achieve their objectives.

To calculate how much coverage you need to replace your income, you can use various methods or rules of thumb. For example:

• Multiply your income by a factor: This method estimates how much income you would earn over your remaining working years and multiplies it by a factor that accounts for inflation and interest. For example, if you are 40 years old and earn $50,000 per year, and you plan to work until 65, you could multiply your annual income by 15 (a common factor) to get $750,000 as your coverage amount. This is a simple and popular method, but it does not consider your specific needs or goals.
• Use the DIME formula: This method calculates how much income replacement you need based on four factors: debt, income, mortgage, and education. For example, if you have $100,000 in debt, $50,000 in annual income, $200,000 in mortgage balance, and $100,000 in education costs for your children, you could add these amounts ($450,000) to get your coverage amount. This is a more detailed and customized method, but it may not account for future changes or contingencies.

• Use a life insurance calculator: This method uses an online tool that takes your personal and financial information into account and gives you an immediate result. For example, you can use this life insurance calculator by Forbes Advisor to estimate your life insurance needs. You just need to enter some basic data, such as your annual income, years of replacement income you may need, debts, savings, and other life insurance coverage—and you will get a result instantly. This is a more convenient and accurate method, but it may not capture all the nuances or variables of your situation.

Reason 5: To Plan Your Retirement

A fifth reason to get life insurance is to plan your retirement by providing a source of income or savings for yourself or your spouse.

If you die before or during retirement, your spouse may lose some or all of your retirement income sources, such as Social Security benefits, pension benefits, annuities, etc. Your spouse may also face higher taxes and expenses due to your death. This can jeopardize their retirement security and lifestyle.

Life insurance can help you plan your retirement by providing a death benefit that can supplement or replace your retirement income sources for your spouse. This money can help them cover their living expenses, taxes, healthcare costs, etc.

Some types of permanent life insurance can also offer cash value accumulation, tax benefits, and investment options that can help you save and grow your money for retirement. You can access the cash value of your policy through loans or withdrawals while you are alive. You can also choose from different types of permanent life insurance that suit your risk tolerance and return expectations.

To determine how much coverage you need to plan your retirement, you can use various methods or tools. For example:

• Estimate your retirement income gap: This method calculates how much income you or your spouse may need to maintain your desired retirement lifestyle and how much income you or your spouse may receive from various sources. The difference between these two amounts is your retirement income gap. For example, if you or your spouse need $60,000 per year to live comfortably in retirement, and you or your spouse receive $40,000 per year from Social Security benefits, pension benefits, annuities, etc., your retirement income gap is $20,000 per year. You can use online tools or apps that help you estimate your retirement income gap. For example, you can use this retirement income calculator by Fidelity to see how much income you may need and have in retirement. You just need to enter some basic information, such as your age, income, savings, expenses, etc.—and you will get a result instantly.
• Multiply your retirement income gap by a factor: This method estimates how much money you or your spouse may need to cover your retirement income gap over your expected lifespan and multiplies it by a factor that accounts for inflation and interest. For example, if you or your spouse have a retirement income gap of $20,000 per year, and you or your spouse expect to live for 20 years in retirement, you could multiply your annual income gap by 20 (a common factor) to get $400,000 as your coverage amount. This is a simple and popular method, but it does not consider your specific needs or goals.
• Use a life insurance calculator: This method uses an online tool that takes your personal and financial information into account and gives you an immediate result. For example, you can use this life insurance calculator by Forbes Advisor to estimate your life insurance needs. You just need to enter some basic data, such as your annual income, years of replacement income you may need, debts, savings, and other life insurance coverage—and you will get a result instantly. This is a more convenient and accurate method, but it may not capture all the nuances or variables of your situation.

Reason 6: To Support a Cause

A sixth reason to get life insurance is to support a cause that you care about by naming a charity or an organization as a beneficiary of your policy.

If you have a passion for a cause, such as environmental protection, animal welfare, human rights, education, health care, etc., you may want to make a difference and create a legacy by donating money to support it. However, you may not have enough money or assets to make a significant donation while you are alive.

Life insurance can help you support a cause by providing a death benefit that can be donated to a charity or an organization of your choice. This money can help them fund their programs, projects, campaigns, etc. It can also help you reduce your estate taxes and income taxes by deducting the value of your donation.

To determine how much coverage you need to support a cause, you can use various methods or sources. For example:

• Research online: You can research online how much money your chosen charity or organization needs or accepts for different purposes and goals. You can use online tools or websites that provide information and ratings on various charities and organizations. For example, you can use this charity navigator by Charity Navigator to find and evaluate charities based on their financial health, accountability, and transparency. You just need to enter some basic information, such as the name or category of the charity, the location, the rating, etc.—and you will get a result instantly.
• Plan ahead: You can plan ahead and arrange your donation in advance with your chosen charity or organization. You can choose the type and amount of donation that you want to make and get a written agreement or contract. This can help you lock in the current value and avoid future changes. It can also help you communicate your wishes to your family and avoid conflicts or confusion.
• Consult a professional: You can consult a professional, such as a financial planner, an estate planner, a tax advisor, or an attorney, who can help you determine how much coverage you need and how to structure your donation in the most efficient and effective way. They can also help you with the legal and tax implications of your donation and ensure that it complies with the rules and regulations.

Reason 7: To Save Money and Get Peace of Mind

A seventh reason to get life insurance is to save money and get peace of mind by locking in low premiums, avoiding taxes, and securing coverage.

If you buy life insurance early, when you are young and healthy, you can lock in low premiums for the duration of your policy. This can save you money in the long run, as premiums tend to increase with age and health issues. You can also avoid paying taxes on the death benefit, as it is usually free from federal income taxes and estate taxes (unless it is part of your taxable estate).

Life insurance can also give you peace of mind by securing coverage for yourself and your loved ones. You can rest assured that your family will be taken care of financially if something happens to you. You can also enjoy life more without worrying about the future.

To save money and get peace of mind with life insurance, you can use various tips or strategies. For example:

• Buy life insurance early: The sooner you buy life insurance, the cheaper it will be. This is because insurers charge lower premiums for younger and healthier applicants, as they pose lower risks of dying. If you wait too long, you may face higher premiums or even be denied coverage due to age or health issues.
• Choose term over permanent (if appropriate): Term life insurance is usually much cheaper than permanent life insurance for the same amount of coverage. If you only need temporary protection for a specific period of time, term life insurance may be a better option for you.
• Compare quotes from different insurers: The cost of life insurance varies by insurer, as each one has its own underwriting criteria, pricing models, and discounts. You should shop around and compare quotes from different insurers to find the best deal for your coverage.
• Use online tools or brokers: You can use online tools or brokers to compare quotes and buy life insurance easily and conveniently. You can also save money by avoiding commissions or fees that agents may charge.

Conclusion

Life insurance is a simple and effective way to protect yourself and your loved ones from financial hardship in case of your death. It works by paying a lump sum to your beneficiaries after your death in exchange for regular premiums that you pay to the insurer.

There are many reasons why life insurance matters and why you should get it. Some of the most common reasons are:

• To protect your dependents
• To pay for funeral costs
• To pay off debts
• To replace your income
• To plan your retirement
• To support a cause
• To save money and get peace of mind

If you are ready to buy a life insurance policy online or review your existing one, we recommend that you use our online tools or brokers to compare quotes and buy a policy today.

Remember, life is unpredictable and precious. Don’t wait until it’s too late to protect yourself and your loved ones with life insurance.