Why You Should Buy Life Insurance

People purchase life insurance for many different reasons, but the core purpose is usually the same — to make sure their loved ones aren’t left with financial hardships after their passing.

The financial strain caused by a death can appear in various forms, such as the loss of household income, ongoing loan payments, or other expenses that become challenging to manage without that person’s support.

If you’re questioning whether you should have a life insurance policy, the simple answer is almost always “yes.” The more important things to consider are how much coverage you need and why you need it. Let’s explore the second question in more depth.

Pro Tip: If you’re thinking about buying a life insurance plan, a term life insurance policy can be an affordable and straightforward option. Some providers offer plans starting at around $10 per month, with quick online applications and no medical exams required.

Common Reasons to Buy Life Insurance

People opt for different types of life insurance depending on their needs—some go for permanent policies such as whole life or universal life insurance, while others choose term life insurance, which provides coverage for a set period and offers no payout if the policyholder outlives the term without renewal.

Often, individuals have multiple motivations for getting life insurance, and their reasons for maintaining coverage can evolve as their circumstances change over time.

1. Settling Final Expenses (Funeral Expenses and Related Costs)

Data from the National Funeral Directors Association shows that in 2019, the average funeral with a viewing and burial cost more than $7,500, while a funeral with viewing and cremation averaged just over $5,000.

Although it’s possible to arrange a funeral for less than $5,000, the emotional value of a proper farewell often outweighs the financial considerations, as it provides closure for family and friends rather than for the deceased.

Even though final expenses might seem modest compared to other costs, it’s important to factor them into your initial life insurance planning. Neglecting this could lead to the need for final expense insurance later in life—a type of term life insurance with a smaller payout specifically meant to cover end-of-life costs. This coverage is usually more expensive than securing standard term life insurance earlier.

2. Paying Off Major Debts

When determining how much life insurance you need, be sure to include any joint debts shared with your spouse or other family members. This can include mortgages, car loans, personal loans, and credit cards held jointly. It also covers debts you’ve cosigned for relatives or even friends.

Additionally, consider debts that cannot be discharged upon death. While most debts disappear when someone passes, some obligations—like certain private student loans—may fall to heirs, unlike federal student loans, which are typically forgiven.

If you live in a community property state, your coverage needs could be higher than expected. Nine states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—have mandatory community property laws. These laws make spouses responsible for debts incurred during the marriage, even if only one spouse’s name is on the account. This means you could be liable for your spouse’s outstanding loans, credit cards, and other debts if they pass away before you.

To ensure financial protection, your life insurance should at least cover all outstanding debts, plus a buffer for additional costs such as prepayment penalties and ongoing housing expenses like property taxes and insurance that continue after your mortgage is paid off.

3. Covering Expenses Indirectly Attributable to the Policyholder’s Death

While no one can hold you responsible for the financial hardship your untimely passing may cause, it’s still important to plan for it.

When estimating your life insurance needs, be sure to include expenses that your family wouldn’t face if you were still alive. These often stem from the loss of your contributions—both financial and practical—and the additional costs your spouse might incur as a result. Such expenses can include:

• Child care for young children so your spouse can continue working full-time or increase their hours
• After-school or part-time care for older kids, allowing your spouse to manage work and household duties
• Household services such as cleaning, maintenance, or landscaping that you previously handled yourself
• Health insurance for your family if coverage was provided through your employer and your spouse’s job doesn’t offer sufficient benefits

The total life insurance coverage required to handle these indirect costs depends on your family’s situation and how long the expenses will last. For instance, if you pass away when your children are 1 and 3 years old, your spouse may need to pay for several years of full-time child care. With annual costs ranging from $15,000 to $25,000 per child, that could total $90,000 to $150,000 over four years before your children start school.

4. Providing for Expected Future Secondary and College Education Expenses

While it’s reasonable to expect that you’ll live long enough to fund your children’s education through savings, an unexpected death could derail those financial plans. In that case, the responsibility of paying for your children’s college education would fall on someone else—likely your spouse or another family member.

To safeguard against this, it’s wise to have enough life insurance coverage to cover your children’s full education expenses through their undergraduate years. You can estimate these costs by using a college savings calculator, such as the free one offered by Saving for College, to explore different financial scenarios.

When calculating, it’s best to plan for the most expensive possibility—that all your children (including any you may have in the future) attend private, four-year universities without receiving financial aid. This approach ensures your family has adequate financial protection, no matter what happens.

5. Maintaining Survivors’ Standard of Living

Your untimely passing shouldn’t create financial hardship for your loved ones. Beyond the emotional loss, the goal is to ensure they can continue living comfortably and pursuing their financial goals without drastic changes to their lifestyle.

In other words, they shouldn’t have to sell the family home, give up a car, or significantly cut back on daily comforts. Ideally, your family should be able to maintain the same quality of life—taking vacations, dining out occasionally, or keeping a second home—just as they would if you were still around.

To achieve this, your life insurance coverage should not only cover debts, education costs, and other financial obligations but also replace a substantial portion of your lost income. A general approach is to calculate this by multiplying your current annual income by the number of years until your planned retirement, then adding a buffer for inflation.

Over time, as you pay down debts, build savings, and accumulate assets, your total life insurance requirement will naturally decline. You don’t need to replace every future dollar of income once your financial position strengthens. Still, if you have significant assets, maintaining some level of coverage can help protect your heirs from estate taxes and preserve their inheritance.

To balance affordability and practicality, consider adopting a life insurance ladder strategy. This involves holding multiple term policies with varying lengths and coverage amounts that gradually decrease over time. It helps reduce premiums as your financial responsibilities lessen, ensuring you only pay for the coverage you truly need.

6. Protecting Business Interests That Will Outlive You

If you co-own a business with one or more partners, it’s important to consider how your death could impact the company’s survival.

The risk isn’t just about losing your unique skills and expertise—it’s also about the financial and operational responsibilities you carry. Your spouse or heirs may not have the knowledge or experience to step into your role, and even a qualified spouse or partner can’t easily replace the contributions of two people.

To protect the business, it’s common to take out key person insurance—a life insurance policy on your life with your business partner listed as the beneficiary. Likewise, you should hold a similar policy on your partner’s life with yourself as the beneficiary.

The death benefits from these policies should be sufficient to cover short-term operational costs and provide the surviving partner with the liquidity needed to buy out the deceased partner’s share under the terms of your company’s buy-sell agreement. This ensures the business can continue smoothly while fairly compensating the deceased partner’s heirs.

7. Tapping Your Policy’s Cash Value During Your Lifetime

About the author — Rashika Editor & Blogger, GlobalFinMate

Editor & Finance Blogger at GlobalFinMate, creating simple and accurate guides on budgeting and personal finance.