This isn’t an article about life insurance. I mean, of course, it is. But mostly this is an article about evaluating sources of risk in your financial wellbeing, and how addressing those risks can lead you to greater peace of mind.

Now let’s talk about life insurance.

For openers, do you need life insurance?

Not everyone does.

The way to answer that question is to start with the problem you’re trying to solve (risk), not the product (insurance). (Side note: This is a good framework to evaluate most financial choices: problem first, product second.)

Do You Need to Insure Against Risks?

A possible particular risk in your life is that someone is dependent on your current income and if you die, they’ll be left in a worse place economically.

The most common example would be if you are a wage earner and you have young children. That’s pretty obvious. But it may also be the case that the dependency arises from your unpaid labor as a caregiver.

photo taken from behind an african american couple sitting in sand on beach as children play in the background

It could also be that while you have no children or even a partner, someone else in your life is dependent on your income. Or it may be that a family member has co-signed a loan for you, and they would be stuck with that debt if you died.

But if none of the scenarios described above apply, it may very well be the case that you do not need life insurance.

There are many people who do not need to purchase life insurance because there is no risk. The loss of their income would not negatively impact anyone else.

This could describe a young adult, but as well it may be an older person who has no current income but ample savings to provide for family members.

Ah, but should I buy life insurance anyway?

Even if there’s no one who would be impacted financially by my demise?

Here’s a common argument:

“While I do not have anyone dependent on my income now, I may have children in the future. Wouldn’t it be cheaper to buy insurance now?”

If I had a crystal ball, I could definitely answer that question. But I don’t and neither do you.

The best we can do is consider the tradeoffs:

There’s just no way to answer the question definitively.

A person who has significant health concerns will certainly have a completely different calculus of their risk i.e., the risk of higher future premiums.

However, there are online resources like this one that you can use to estimate your premiums under various scenarios, which may help you make the decision.

How much do I need?

If you do determine that you need life insurance, how much coverage should you buy?

There is a common rule of thumb that states the death benefit should be equal to at least 10x your annual gross income. And, absent any deeper analysis, that’s not at all a bad place to start.

Some people will look at that number and think it is quite high; yet, it may not be large enough.

What are all of the economic risks faced by your family if you die?

Read: Estate Planning for Millennials. [Yes, you need a plan.]

Bear all these factors in mind as you consider what may be your next question: “What about my workplace policy?”

Many employers offer a very low cost (or even free) life insurance plan with at least a small death benefit as part of your compensation plan. Probably everyone should take advantage of this, if for no other reason than to cover burial costs.

Still, considering all the economic risks listed above, is the workplace plan death benefit enough?

You also need to consider that when you leave your employer, the life insurance benefit ends; you may not want to be thrown into the life insurance open market at middle age.

Types of Life Insurance

I’ve deliberately talked about the problem – the economic risk of dying – and less so about features of the specific product, insurance. So, a quick nod to the eternal term versus permanent life insurance debate.

The basic facts are these:

Complexity — a lot of complexity — enters the picture as permanent life insurance policies include investment features; think of it as an “add on” that’s meant to take the sting out of paying many years of higher premiums.

When you purchase permanent life insurance, you’re buying both an insurance product and an investment product. You need to evaluate it as such and compare the decision to purchase a policy not just to other insurance products, but as well to other investment options available to you.

Plan well

No plan for true financial wellbeing is complete without a consideration of the sources of risk in your life, and the deliberate actions to mitigate these risks.

For many, the necessary action includes purchasing life insurance.

Next: 7 Ways to Achieve a More Balanced Life

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