The real answer to the question about whether or not you need life insurance is “it depends.” Not a real answer, to be sure, but it’s the truth. As a general matter, at least with respect to people with families, life insurance is really “income protection.” It’s purpose is to replace the lost income in the event of the untimely death of one of the parents, leaving the surviving spouse and children to cope with a mortgage, bills, college tuition and the surviving spouse’s retirement needs.
The only relevant question is: Have you accumulated enough savings so that your spouse and children can continue to live in the house and carry on with their life plans if you aren’t there any longer? If you have, then you don’t need life insurance. However, according to the US Social Security Administration, by the time we reach retirement age, 90 percent of us will be either dead broke or just plain dead. Odds are, then, that you do need life insurance, at least until such time as you have accumulated enough savings that you no longer need it.
The real questions, then, are what kind of insurance do you need, and for how long? With regard to the first question, most life insurance vehicles are broken down into two categories: “term” insurance or “cash value” insurance. Term insurance is where you buy life insurance that covers you for a fixed period of years, such as 20, 30, or even 40 years.
“Cash value” insurance is far more expensive than term, but includes a cash accumulation, and is thus marketed as a secure investment vehicle. Because of the cash value, you get to keep the coverage in place until age 100, as long as you have kept up the premium payments.
So which is better? The answer may be somewhat controversial, but as Dave Ramsey points out, term insurance is the better option for the majority of people. It’s a cheaper way to purchase income protection. Suze Orman echos Ramsey’s views as well. The cost difference could add up to thousands per year, and the difference could be invested into relatively safe investment vehicles that accumulate savings.
With regard to the second question, your life insurance needs will change over the course of your life. In 20 – 30 years, your kids will have graduated college and started families of their own, your mortgage will have been paid off and, if you’ve planned responsibly, you and your spouse will have accumulated a nest egg on which to retire. Simply put, since your circumstances and needs have changed, you probably won’t need as much insurance was when you were younger.
Until that time, life insurance is an important tool in your financial arsenal.