Do I Need Life Insurance? Here’s How to Decide

Life insurance can offer critical peace of mind, but how do you know if you actually need it? A life insurance policy can ensure your loved ones won’t be left scrambling to cover funeral costs, mortgage payments, or lost income if something happens to you. It’s not just about replacing a paycheck—it’s about protecting the people who rely on you financially, emotionally, or both.

But even though it can be a powerful tool, life insurance isn’t a must-have for everyone. “Ask yourself: If I died today, who would be financially impacted?” says Michael Helveston, founder of Whitford Financial Planning. That question tends to quickly reveal whether you need coverage—and how much.

Key Takeaways

• Life insurance is a hedge against financial loss caused by premature death, not a one-size-fits-all investment.
• The biggest need arises when others depend on your income or you carry long-term debt.
• Policies are cheaper when you’re young and healthy, but the best amount and timing vary by life stage and personal circumstances.

When Life Insurance Makes Sense—and When It Doesn’t

According to Ben Lies, founder and president of Delphi Advisers, one of the most common needs for life insurance is when one spouse earns significantly more than the other, and the income is not portable after death. “This scenario is fairly prevalent in young families where one spouse carries the primary burden of financial support, and if they pass away, that income is just gone,” he says. That also includes retirees with a large pension that stops at death or offers a reduced survivor benefit.

Other scenarios where coverage may be critical:

• You’re a business owner and need to protect partners or co-signers
• You have dependent children, especially if they have special needs
• You have a large, illiquid estate with potential tax burdens

And when might it not be necessary? If you’re single, have no debt, and your assets are liquid and sufficient to cover funeral and estate costs, life insurance probably isn’t necessary, Lies says. For others, a small policy can be helpful and give peace of mind.

How Much Coverage Is Enough?

There’s no perfect formula, but both Lies and Helveston warn against relying solely on industry rules of thumb.

“Some rules of thumb can lead to being quite overinsured, which is expensive, whereas others can leave people drastically underinsured,” says Lies.

Still, starting with a rough estimate—like 10 times your salary—isn’t a bad place to begin. Just make sure to refine your estimate as you consider other factors.

Helveston recommends using the DIME method (debt, income, mortgage, and education needs) for a more customized approach to calculating your insurance needs.

The DIME method adds up the following factors:

• Existing debts.
• Annual income (times the number of years your dependents will need to live off it)
• Remaining mortgage balance
• Estimated future education costs.

But, Helveston cautions, you may not need to cover 100% of every line item if your partner also earns income or would continue working.

For families with young children, Lies says it might make sense to aim for 10 to 15 years of income replacement if the goal is to allow the surviving parent to stay home. For retirees, the calculation shifts toward replacing any lost pension or income streams.

Warning

Cash value policies combine permanent life insurance with a cash value component, but the premiums can be significantly higher. If your goal is growing wealth, you may be better off with term life insurance and a separate investment or retirement account.

When Is the Best Time to Buy?

So when should you get life insurance?

“The younger the better as far as rates are concerned,” Helveston says. He recommends a laddered approach—say, pairing a 30-year term policy with a 20-year one—to “provide more coverage in the earlier years and less in the later years, when it may not be as critical.”

Locking your policy in early—say, as a younger adult—can also help you secure lower premiums.

Lies flags three life stages in which you may want to consider life insurance: when starting a family, approaching retirement, or later in life, for potential estate or long-term care planning.

What If You’re Single or Don’t Have Kids?

Even if you don’t have dependents, a small policy might be worthwhile to cover burial or legal costs. “It’s not cheap to pay for a funeral, burial, services, etc.,” Helveston says, “so even $10,000 to $25,000 of coverage can be helpful to cover those expenses alone.”

If your estate includes illiquid assets, a basic life insurance policy can also help your executor avoid a fire sale of property or investments.

Avoid These Common Mistakes

Don’t assume life insurance is the best place to grow your money. Cash value policies—which include a built-in savings or investment component, and are designed to last your entire life—can be helpful in certain estate planning or long-term care scenarios.

But they generally come with higher premiums than term life insurance, so they’re not always the most efficient choice. “In most situations, a term life policy and separate investments will be much more lucrative,” says Lies.

Also, don’t over- or under-insure based on formulas alone. “Typically, people should look at the insurance calculation as ‘what is the minimum policy I can get away with and not hurt my family?’” Lies adds. “Then invest the rest.”

The Bottom Line

Life insurance is a personal decision. The best time to buy is before you actually need it, and the right amount depends on what you’d want to protect if you weren’t here tomorrow.

Rough math and rules of thumb—such as 10 times your income or the DIME method—can offer a starting point to estimate your family’s needs. But that estimate should be refined according to your actual needs and goals. When in doubt, an advisor can help you run the numbers and make the best decision for you and your loved ones.