Probably.  There are a few situations where I would suggest not purchasing life insurance, but those are rare, and we’ll discuss them in more detail later.

Your answer to this question comes down to the following

• Does someone depend on you financially?
• If you were pass away right now, do you have enough saved to pay off your debts?
• Do you want to leave a legacy behind for anyone?
• Have you either prepaid or saved enough for the final expenses that you want?

If you are able to cover all of these areas and have enough saved, then maybe life insurance isn’t the right fit for you.

The long and short of it is that you give a company money and if you die, they pay the person named on your policy the death benefit.  For the most part, this requires your policy to be active (you can’t be behind on premiums), although there are some riders that will allow you to work around this.

Life insurance needs to fulfill one of the following needs

1. Final Expense cost.  This can be a simple cremation or a giant funeral where your policy pays enough to fly your whole family in from out of town to celebrate your life.
2. Income replacement.  When we die, if there is someone who relies on us financially, we want to make sure we are able to provide for that person.
3. Paying off debt. This can be a mortgage, credit card bills, really anything that needs to be paid for after we die.

Now, I understand that this is very subjective, and a lot of agents and brokers will tell you otherwise, but, I feel, these are the only valid reasons to purchase life insurance.  Want to leave a legacy behind for your kids?  There are better ways to do that.  Trying to save money down the road?  Again, there are better ways; life insurance isn’t a savings account.

This list is not complete, but it covers what I feel are main types of life insurance.

Whole Life

This is a life insurance policy that generates cash value and you own for the rest of your life.  Coverage amounts vary by company, but generally between $2,500-50,000.  Sometimes these types of policies can be graded (this is when the policy wont pay out the full death benefit for a few years).

Term Life

This is temporary policy, kind of like renting life insurance.  It last only for a certain amount of time and once that time hits, the policy is no longer in effect.  These are ideal for people who are still working and want a substantial amount paid to their beneficiary as income replacement.  The amounts paid out on these policies typically start out around $100,000 and can go up seemingly infinitely from there.  Policies usually last anywhere from 10 to 20 years, but can extend longer in some cases.  Most companies will not offer term insurance to, or allow term insurance to cover, someone who is over the age of 80.  Some term life policies have a convertability rider that allows you to turn your term insurance into whole life insurance once the policy reaches it end.  While you won’t pay the same rate you would have year ago when you purchased the term policy, you also will not need to answer medical questions, which is great for people whose health may have declined.

Universal Life

Universal life policies are another type of whole life and also generate cash value.  These policies can be custom built to get what ever you want.  Want $100,000 worth of whole life plus a $400,000 20 year term rider?  This policy can do that.  Maybe you are concerned about the rising cost of Long Term Care?  A lot of companies have riders that can be added onto these policies to help pay for that.  Most importantly however, these policies are adjustable.  You can adjust your premium amounts and death benefits within the policies guidelines.

Variable Life 

Variable life insurance is another type of whole life insurance (meaning it generate cash value).  What makes variable different however is the option to invest a part of your policies cash value in the stock market.  This allows the cash value to potentially increase faster than with a whole life policy not tied to the market.  There are however risk involved as the market does not always do what we want it to do.  In order to sell a variable life insurance policy, an agent or broker needs to be registered with FINRA (this is a regulatory body that ensure fair market practices.  Registering with FINRA requires a Series 6 license or higher).

Decreasing Term

This is a bit of a niche type of insurance, but it deserves a spot on this list for how it functions.  Like term life, it is a temporary policy that will expire.  Unlike term life, the death benefit for these policies actually decrease over time.  The reason for this that they are often taken out to help pay off mortgages, student loans, or any other type of debt if you were to pass away before the debt was paid off.  Because you are still paying on the debt while you are alive, the death benefit decreases as you lower the principle of your loan.  A lot of times, the beneficiary for these policies is the company that holds the loan, not a loved one.

That really depends on your situation.  If you’re young, a universal life may be great to buy now, securing enough to cover final expenses later in life at a low monthly premium.  You could also add on a term life policy to supplement your families income in the event of your passing.

During your working years, a term life policy is great for coving income replacement for your family.

If you’re not adverse to the risk, a variable life policy may work great for you.

If you already retired and your health has declined since your younger years, a simply whole life policy may be perfect to ensure that your loved ones are not burdened with the financial cost of a funeral by your passing.

Not usually, but sometimes.  The death benefit paid by a life insurance policy is generally not taxable.  Additionally, it is not held up in probate (this is a fancy word for the legal process that occurs when a person dies and they have a will that needs to go through the court system).

There are exceptions however.  If your life insurance policy generated interest (say from a variable or universal life policy), then the person who received the death benefit would need to pay income taxes on the interest amount only.

There are four main ways to estimate how much life insurance you will need and all differ slightly on what it is you are looking to get out of a life insurance policy.

• Multiple your annual income by 10.  This is a pretty easy way to estimate your family’s overall needs for income replacement, but does not take into account your savings nor does it offer a coverage amount for stay at home parents, who should have coverage even if they do not make an income.
• Multiple your annual income by 10, plus $50,000 for each child’s educational needs.  Again, we are moving the decimal to the right once, but this time also adding extra coverage for your child’s education.  While college and other education needs are an important consideration when looking at life insurance, this method still does not take into account your family’s assets, expenses, or other life insurance policies.
• The DIME method.  DIME stands for Debt, Income, Mortgage, & Education; the four areas we should be looking at when calculating life insurance needs.

1. Add up all of your current debt, excluding your mortgage, as well as final expense cost
2. Determine how many years of financial support your family would need, and multiple your income by that number
3. Calculate the amount needed to pay off your mortgage.
4. Estimate your children’s future education cost.

While this formula is a much more well rounded approach, it still does not account for the life insurance or savings that you already have, nor does it provide an estimate for stay-at-home parents.

• Replace your income, plus a cushion. With this method, you will buy enough coverage that your beneficiaries can replace your income without needing to spend the payout itself and instead invest the lump sum to live off the interest.

To calculate the amount, divide your annual income by the estimated rate of return.  For example, if your income is $50,000 and you estimate a 4% return, you would divided $50,000 by 4%, arriving at $1.25 million.  Your beneficiaries would put the payout into a bank account earning 4% annual interest and expect to generate $50,000 a year to replace your income.

When your dependents no longer need the income to meet daily living expenses, the invested lump sum can go towards other goals such as college tuition, home buying, or retirement income.

These are a few of the more common riders added on to life insurance policies

Accelerated Death Benefit Rider

• This rider allows you to take money from the death benefit while you’re alive if you’re diagnosed with a terminal illness.  You will need a doctor to confirm that you are terminally ill and that you have only between 6 and 12 month to live to be eligible for a payout.  This money can be used for anything from end-of-life care or even a family vacation as a living benefit.  The amount that you receive will be described in the policy, but can be as high as 80% of the total death benefit.

Critical Illness Riders

There are a number of these that can be added on, but generally, they pay you money from the death benefit in a lump sum

• Chronic illness rider- These are typically better purchased as a stand alone plan, but can be beneficial in some instances as part of a life insurance policy

• Long term care rider

• Waiver of premium for disability rider- These allow you stop all payments on your policy if you are disabled and can not work without the policy being cancelled)

Family Riders

• These let you add on insurance for a spouse or child.  Most child riders can be converted to a permanent insurance policy once they enter adulthood.

Accidental Death & Dismemberment Rider

• With this rider your policy will pay extra (usually anywhere from 1.5-2x the normal death benefit)  if you die in a way deemed to be an accident.  This rider also often has option to pay out a portion of the death benefit if you lose a limb or digit in an accident.  These are popular riders for people with riskier jobs.

Benefit Structure Riders

All of these riders add features to your policy that some see as a benefit.

• Return of Premium rider- If you outlive your policy, all of your premiums will be returned to you tax free.  These are very expensive riders and not generally worth it.

• Reinstatement without Evidence of Insurability- With this rider, if your policy lapses and the cash value becomes zero, you have a predefined number of days to make a payment.  If you do so, the company will reinstate your policy without requiring you to go through additional health questions, as they found you insurable in the past.

• Term Conversion Rider- These are added to Term Life.  When the policy expires you have the option to purchase a whole life policy without additional underwriting.

• Family Income Rider- With this rider, if you die while the policy is active, instead of one lump sum, you family will instead receive monthly installments, like income.  The cost of this rider varies, but if you think that your beneficiary would be better off receiving regular installments instead of one large lump sum, this might be a good rider for you.

• Guaranteed Insurability Rider- This rider allows you to increase the size of your death benefit at certain predefined milestones.  You’ll have to pay more each month for the larger policy, but if you buy a policy when you’re twenty and have a child eight years later, it can be nice having the option to increase you policy to account for your changed circumstances.

This really depends on a lot of factors.  You age, sex, current & past health, driving record, where you live, the type of policy, how much you want to policy to pay, and much more all factor into this.

You can, but only if your policy has generated a cash value and only up to a certain amount of that cash value.  Keep in mind that you do have to pay that money back before the company will pay the death benefit (often times the insurance company will keep a portion of the death benefit to repay the loan for you) and you have to pay interest on that loan. 

So while it is an option offered on a lot of policies, I would not recommend it.

I would argue that you are never too young to get a whole life policy.  All life insurance prices increase with your age, and a whole life policy that pays out $45,000 can be as inexpensive at $15 per month if you purchase it while under the age of ten.  Obviously, you can not take this policy out on yourself, but you can take it out on your kids and then transfer ownership to them when they are older and can make the payments.  By doing this at a young age, you can reduce the monthly cost that could potentially burden them if they wait too late in life.

There are times where I would not recommend life insurance to someone because they are too old.  Most companies will not issue a policy to someone over the age of 80, and even then, the premiums are very high.  More often than not, that money can be put to better use elsewhere, even if it is earmarked for Final Expenses.

Sometimes.  This depends on the insurance company, the type of policy, your age, and how much money you want for your policy.  When this does happen, the insurance company will always pay for the test themselves and you will have a while to get the test done.  It is worth noting however, that it won’t be your doctor and your policy won’t be active until these test are complete.

There are times where a life insurance policy would not pay when you die.  For most of us, we don’t need to worry about that, but I will cover it just to clear up the confusion

• If you lied on your insurance application or committed insurance fraud
• If you died practicing a risky habit or activity excluded from your policy (most policies have a list like this.  Most applications even ask you if you do things like sky diving or bungee jumping.  If you die during an accident while participating in one of these activities, you policy may not pay).
• If you are murdered by the policies beneficiary
• If you commit suicide within the first two years of the policy starting
• If you die while participating in an illegal activity
• If you die by overdose during the contestability period.
• If you die from an act of war (for instance if you are in the military).

I think so.  I sleep better at night knowing that my loved one will not need to struggle financially if something were to happen to me tomorrow.  But this is a question that you need to answer for yourself.

You can pull from this list as a pretty good start.  It will at least tell you if the person you’re working with understands life insurance and what tools they have to work with.  Remember, not everyone sells everything.  Some types of policies (such as variable life) are gated behind some pretty strict requirements.

I think the more important thing to look for is what questions your agent ask you.  You want someone who is invested in you and your specific situation, not someone who is just trying to sell another policy.