Life insurance is badly named, and the name causes most of the confusion around it.
It does not insure your life. It replaces your income for the people who depend on it.
Beth Kobliner suggests it would be clearer if we called it income protection coverage, and she is right — because once you think of it that way, both the questions people struggle with answer themselves.
First: Do You Need Any?
One test. Would anyone suffer financially if your income stopped permanently?
If nobody would, you do not need life insurance. Not a small policy, not a starter policy, none.
People who generally do not need it:
- Single, no children, nobody financially dependent on you
- Married with no children, both partners earning enough to manage alone
- Children grown and self-supporting, partner with their own income or sufficient assets
People who generally do:
- Children who depend on your income
- A partner who could not maintain their situation without it
- A parent or relative you support
- A shared mortgage your partner could not carry alone
Do not insure a child’s life. A child produces no income for anyone to lose. Policies marketed for children exist to be sold, not because there is a need.
And note who is usually telling you that everyone needs coverage. It is frequently someone paid a commission on the sale.
Why the Multiple-of-Salary Rule Fails
You will see “ten times your income” everywhere. It is a starting point rather than an answer, and it can be wrong in either direction by a wide margin.
Consider two people earning the same $80,000.
The first is 30, has two young children, a large mortgage, and a partner at home full time. Ten times income may well be too little — the children need support for eighteen years, and someone has to be paid for the work the partner currently does.
The second is 55, mortgage paid, children independent, partner earning $70,000 with a funded retirement account. Ten times income is far more than anyone would need.
Same salary. Completely different answers. The rule ignores every variable that actually matters.
How to Work Out a Real Number
Four steps, roughly twenty minutes.
1. What would they need each year?
Not your full salary. Your household expenses minus what you personally consume — food, commuting, your own costs. Often around 70 percent of current household spending.
Then add what is not currently paid for in cash.
This is the step people skip. If a partner is at home, someone has to do what they do. Childcare, school runs, meals, household management. Priced at market rates, that figure is substantial — and it disappears the moment the earning partner does, because the surviving partner may have to work.
Whether the person at home is the one insured or not, the replacement cost belongs in the calculation.
2. For how many years?
Until your youngest is financially independent is the usual answer — through college if you intend to fund it.
If a partner would struggle to support themselves indefinitely, longer.
3. Add the one-time costs
Outstanding mortgage. Other debts. Funeral expenses. Education, if you want it covered.
4. Subtract what already exists
Three things, and two of them get forgotten.
Existing savings and investments. Straightforward.
Employer-provided coverage. Many employers include some life insurance. Find out how much. Note that it usually ends when the job does, so treat it as a supplement rather than a foundation.
Social Security survivor benefits. This is the one almost no article mentions, and it can be worth a great deal.
If a working parent dies, minor children may be eligible for monthly survivor benefits, as may a surviving spouse caring for young children. There is a cap on the total a family can receive, and eligibility depends on work history.
The amounts are not trivial, and they reduce what your own coverage needs to produce. Your Social Security statement at ssa.gov shows the estimated survivor benefit for your record — worth checking before buying anything.
The remainder after these subtractions is roughly what you need.
Two free calculators worth using rather than doing this by hand: the American Institute of CPAs offers one at 360financialliteracy.org, and ESPlanner has a basic version.
Buy Term. Ignore the Rest.
Term life insurance covers a fixed period — commonly 10, 20 or 30 years. If you die during the term, it pays. If you do not, it expires and you have paid for protection you did not need, exactly like your car insurance.
It is straightforward and inexpensive.
You will be pitched alternatives with names like whole life, universal life, and variable life. These bundle insurance with an investment component, and the arguments for them are usually built around tax-deferred growth and forced saving.
They cost several times what term coverage costs for the same protection, and the fees inside them are difficult to see.
The cleaner approach for almost everyone: buy term, and put the difference into a retirement account where the costs are visible and you control the investments. Our guide covers which retirement accounts to fill first.
Note also who benefits from the recommendation. Cash-value policies pay considerably higher commissions than term.
Choosing a Term Length
Match the term to the period during which people depend on you.
New parents commonly take 20 or 25 years, covering until the youngest is independent.
If your mortgage has 18 years left and your children are 10 and 12, a 20-year term covers both concerns.
Longer terms cost more, so there is no reason to buy 30 years of coverage for a 15-year need.
One thing to check: whether the policy is convertible, meaning you can switch to permanent coverage later without a medical exam. Rarely needed, occasionally valuable if your health changes.
Where to Buy
Term life is close to a commodity. Identical coverage from different insurers differs mainly on price, so comparing matters.
Comparison sites include Term4Sale.com, SelectQuote.com and LifeInsure.com.
Veterans should check the Department of Veterans Affairs at benefits.va.gov/insurance, which can be considerably cheaper. Anyone with a military family connection should check USAA.
Two practical points. Rates rise with age, so delaying costs money. And coverage is priced on health, meaning buying while you are well is materially cheaper than buying after a diagnosis.
The Form That Overrides Your Will
This catches people out, and it is worth knowing.
Life insurance pays whoever is named as beneficiary on the policy — regardless of what your will says.
The same applies to retirement accounts. A will does not govern them; the beneficiary designation does.
Which means a policy naming an ex-spouse pays the ex-spouse, even if your will says otherwise and even if you divorced years ago.
Two things to do:
Check every beneficiary designation now. Life insurance, 401(k), IRA, workplace policies. It takes fifteen minutes.
Update after any life change. Marriage, divorce, a child, a death. This is among the most common and most consequential financial oversights there is.
The Documents That Go With It
Insurance handles the money. Several other things determine what happens around it.
A will directs your possessions, names an executor, and — critically for anyone with children — names a guardian. Without one, a court decides.
A durable financial power of attorney lets someone manage your finances if you are incapacitated rather than deceased. Without it, your family may need a court process to pay your bills.
A living will and healthcare power of attorney set out your wishes for medical care and name who ensures they are followed.
Simple versions can be prepared inexpensively online, though anything complex warrants a lawyer.
Do Not Forget Disability
One thing worth stating plainly.
During your working years, you are considerably more likely to be unable to work for a period than to die. Yet most people carry life insurance and have never considered disability coverage.
Look for a policy replacing 60 to 70 percent of income, and check whether your employer offers it — group rates are usually cheaper than buying individually. We covered the reasoning in which insurance you actually need.
If you are choosing between the two on a limited budget and nobody depends on your income, disability coverage is the one that protects you.
The Bottom Line
If nobody depends on your income, you do not need life insurance.
If someone does, work out what they would need annually, for how many years, plus one-time costs — then subtract savings, employer coverage, and Social Security survivor benefits.
Buy term. Match the length to how long people depend on you. Compare prices, because identical coverage varies.
Check your beneficiary designations today. That form, not your will, decides where the money goes.
And if you do not have disability coverage, that is probably the more urgent gap.
This article is general information, not personalized insurance advice. Coverage needs, product terms, and benefit eligibility vary considerably — check your own policies and consider speaking with a fee-only advisor who does not earn commission on what they recommend.
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