Life Insurance Explained: Do You Need It and How Much?
Life insurance pays money to the people who depend on you if you die. This guide covers who needs it, the main types, how to work out how much coverage you need, how long a term to choose, what affects the price, useful riders, naming beneficiaries and how to buy a policy without paying for more than you need.
By Pond.com editors Updated 4 min read
Quick answer
- Life insurance pays a sum of money, called a death benefit, to the people you choose if you die while covered.
- You likely need it if others depend on your income or care, such as children, a partner or a co-signer on a loan.
- Term life covers a set number of years and is the cheapest way to get a large amount of cover.
- A common starting point is coverage of 10 to 12 times your income, adjusted for debts, savings and future costs.
- Life insurance through work is useful but often too small and usually ends when you leave the job.
Life insurance isn't something most people enjoy thinking about. But if anyone depends on you, it can make sure they can stay in their home, pay the bills and get through a difficult time without money worries on top.
This guide is general information, not financial or insurance advice.
Who needs life insurance
You probably do if:
- Children or a partner rely on your income
- You're a stay-at-home parent whose care would be expensive to replace
- Someone co-signed a loan with you, like a private student loan
- You own a business with partners or debts
- You want to leave money for final expenses or to people you care about
You may not need much, or any, if no one depends on you and you have savings to cover final costs.
The main types
| Type | How it works | Best for |
|---|---|---|
| Term life | Covers you for a set term, often 10, 20 or 30 years; pays out only if you die in that time | Most families who need a lot of cover at low cost |
| Whole life | Lasts your whole life with fixed premiums, and builds a cash value | Lifelong needs, some estate planning |
| Universal life | Lifelong cover with more flexible premiums and cash value | Specific long-term needs; more complex |
See term vs whole life insurance.
How much cover you need
A rough rule is 10 to 12 times your yearly income. A more careful way is to add up what your family would need, then take away what you already have:
- Debts: mortgage, car loans, credit cards
- Income: years of income your family would need replaced
- Future costs: children's education, childcare
- Final expenses: funeral and other costs
- Minus: savings, investments and any existing life insurance
Here's a simple example for a parent earning $70,000 a year:
| Need | Amount |
|---|---|
| Mortgage balance | $250,000 |
| Other debts | $15,000 |
| Income for 10 years | $700,000 |
| College for two children | $100,000 |
| Final expenses | $15,000 |
| Total needs | $1,080,000 |
| Minus savings and work life insurance | –$180,000 |
| Coverage to consider | About $900,000 |
Your numbers will differ, but writing them down usually gives a better answer than a rule of thumb.
How long a term to choose
Pick a term that lasts until the people who depend on you no longer would. Common choices:
- Until your youngest child finishes school or college, often 20 years
- Until your mortgage is paid off, often 25 or 30 years
- Until you retire, when your savings may be enough to support a partner
Longer terms cost more each year, but locking in a rate while you're young and healthy can be worth it.
What affects the price
- Age and health: the younger and healthier you are, the cheaper it is.
- Smoking: smokers pay much more.
- Amount and length of cover.
- Type: term is much cheaper than permanent cover.
- Risky jobs or hobbies.
Riders worth knowing
Riders are optional add-ons to a policy. Common ones include:
- Waiver of premium: stops your premiums if you become disabled and can't work.
- Accelerated death benefit: lets you use part of the payout early if you're diagnosed with a terminal illness. Many policies include it free.
- Child rider: adds a small amount of cover for your children.
- Conversion option: lets you turn a term policy into a permanent one later without a new medical exam.
Only pay for riders you'd really use.
Life insurance through work
Many employers offer free or cheap group cover, often one or two times your salary. It's worth having, but it's usually not enough on its own and often ends when you leave the job. Many people combine it with their own term policy.
Naming beneficiaries
- Name a primary and a contingent beneficiary, in case the first person dies before you.
- Don't name young children directly. Insurers can't pay a large sum to a minor, so a court may need to appoint someone. Many parents name a trust or a custodian instead.
- Keep it updated after marriage, divorce or a new child.
How to buy a policy
- Work out how much cover and how long you need.
- Get quotes from several insurers, or use an independent agent.
- Answer health questions honestly; wrong answers can lead to a claim being refused.
- Check the insurer's financial strength ratings.
- Name your beneficiaries, and keep them up to date.
- Use the free-look period after you buy to review the policy; you can usually cancel for a refund.
- Keep paying on time. A lapsed policy pays nothing, and buying again later usually costs more.
Common questions
Often not, unless someone depends on you financially, someone co-signed a loan with you, or you want to cover final expenses. If you expect to have a family later, a term policy bought while you're young and healthy can be cheaper.
Usually yes. Replacing childcare, household work and other support costs a lot, so a stay-at-home parent's death can create a big financial gap even without a paycheck.
Life insurance death benefits are generally not subject to federal income tax for the people who receive them. Interest on a delayed payout, and some estate situations, can be taxed.
Not always. Many insurers offer policies without an exam, using health questions and records instead. Policies with an exam can be cheaper if you're healthy.
Yes. Many people have a policy through work plus one of their own, and some buy two term policies of different lengths, such as a large 20-year policy while children are young and a smaller 30-year one to cover the mortgage. Insurers will ask what cover you already have.