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Do I Need Life Insurance?

There are certain types of insurance we all need. Health insurance immediately comes to mind, as do homeowners or renters insurance and auto insurance for those of us who drive. But when it comes to life insurance, the answer isn't always so clear-cut. For example, if you're the sole income earner in your family, it pays to buy life insurance. But what if you're married without children and your spouse has a job, too? In that case, the need for income replacement isn't as great. That's why you'll need to answer one key question to determine whether getting a life insurance policy is a smart financial move.

Is life insurance a worthwhile investment?

The purpose of having a life insurance plan is to give your loved ones financial protection in the event that you pass away earlier than expected. Of course, if life insurance were free or incredibly cheap, most of us would get it. But because premiums can be quite hefty, you'll need to figure out whether it really makes sense for you. And the best way to do that is to ask yourself one simple question: Will my death impact anyone else's finances?

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So let's go back to the above example of a childless person whose spouse works as well. Sure, your spouse might have a means of earning a living, but what if you bought a house together under the assumption that you'd both be making money to pay the mortgage? If you pass, your spouse might struggle to keep up with those payments. On the other hand, if you have life insurance and pass, your spouse might manage to keep that home.

The same holds true if you're a stay-at-home parent who doesn't earn an income. Even if you're not contributing financially to your household, your death would indeed impact your family's finances. That's because if you pass and therefore aren't around to care for your children, your spouse will need to start paying for child care in order to continue working.

When you think about your need for life insurance, it almost doesn't matter how much you earn or whether you actually earn any money at all. Rather, the decision should be based on whether your passing will negatively impact the finances of someone else in your life (typically a child or spouse). If the answer is yes, then it pays to get a policy.

How and when to buy life insurance

Once you determine that you should, in fact, have a life insurance policy, the next step is deciding when to apply and figuring out which type of policy is best for you. As a general rule, the younger and healthier you are when applying, the lower your premiums will be. But in some cases, it might pay to wait. For example, if you've recently gained weight and are above what's considered the healthy limit for your age, it might pay to hold off, work on shedding some pounds, and apply for insurance once you're in better physical shape.

The next step of the process involves deciding how much coverage to purchase. A $1 million death benefit will cost more than a $200,000 payout, so the amount of insurance you buy should be based on the amount of replacement income you're aiming to leave to your beneficiaries. If you're working with a financial advisor, that person can help you pinpoint that amount. You can also ask your insurance agent to break down some numbers for you based on your present and projected finances, but keep in mind that he or she may try to upsell you on a coverage amount you don't need.

Types of life insurance

Once you determine how much coverage you want, you'll need to decide which specific type of insurance to get. Your two choices are term life insurance versus whole life insurance.

Term life insurance works by offering coverage for a specific period of time, or term, and is typically less expensive than buying a whole life policy. Term life policies do not accumulate any cash value over time. If you pass away during your period of coverage, your beneficiaries will collect your death benefit. If you live until the end of your policy's term, nobody gets anything.

Whole life insurance, meanwhile, is designed to offer coverage for your entire life. Whole life insurance policies accumulate cash value over time, so that if you decide to surrender the policy later in life (say, if you've managed to live until 80), you get to take the cash in lieu of a death benefit payout. Whole life insurance tends to be much pricier than term insurance, but you can also use it as an investment vehicle, which could make those higher premiums worth the cost.

There's a lot of thought that goes into the decision of whether to buy life insurance, so don't make the mistake of rushing through the process. Finally, if you do buy a policy, review it periodically to make sure it still serves your needs. You may need to up your coverage as life evolves, so keep it on your radar to ensure that your family is adequately protected.

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