🎯 In 30 seconds: Life insurance is for the people who would struggle without your income or your unpaid work. Add up what they would need, subtract what you already have, and buy that much. For most families that means term insurance for the years the need lasts. Permanent policies have real uses, but they are expensive ways to buy a death benefit and weak ways to invest.
Who needs it, and who does not
- Usually needs it: a parent of young children, a partner whose income pays the mortgage, a stay-at-home parent (replacing childcare and household work costs real money), someone supporting an aging parent.
- Usually does not: a single person with no dependents, a retiree whose spouse would be fine on savings and Social Security, a child.
Insurance basics covers the words. This page is about getting the amount and the type right.
How much: build the number yourself
Quick multiples of income are a rough start. A needs calculation fits your family. Sam, 35, earns $80,000. His partner Lee earns $40,000. Their children are 3 and 6, and they owe $260,000 on the house.
| Replace Sam’s share of family spending (other than the mortgage) until the youngest is 18: $45,000 × 15 years | $675,000 |
| Pay off the mortgage | $260,000 |
| College help: $50,000 per child | $100,000 |
| Final expenses | $15,000 |
| Cushion for the adjustment year | $20,000 |
| Total need | $1,070,000 |
| Minus life insurance at work (1× salary) | −$80,000 |
| Minus savings outside retirement accounts | −$40,000 |
| Coverage to buy | about $950,000, so $1 million |
Two refinements. Social Security survivor benefits for young children can lower the need; your my Social Security account shows survivor estimates. And this simple version ignores investment growth on the payout and inflation, which roughly cancel each other out over shorter periods. Lee needs a policy too: if Lee died, Sam would pay for childcare.
Term vs permanent: a worked comparison
Term covers a fixed period (10, 20 or 30 years) and pays only if you die in it. Permanent (whole, universal, variable universal) lasts for life and has a cash value, so premiums are much higher. The figures below are illustrative quotes for a healthy 35-year-old, not real prices; get your own quotes.
| Option A: term | Option B: whole life | |
|---|---|---|
| Death benefit | $1,000,000 for 20 years | $250,000 for life |
| Monthly premium (assumed) | $55 | $300 |
| Coverage per $1 of yearly premium | about $1,515 | about $69 |
| If Sam dies in year 8 | Family gets $1,000,000 | Family gets $250,000 |
| The $245 a month difference, invested for 20 years at an assumed 6% | about $113,200 in Sam’s own account | Goes into premiums; check the policy’s guaranteed cash value column |
For the same budget, term buys four times the protection during the years the family needs it most. The catch: the investing half only works if Sam actually invests the difference, and a term policy that expires leaves nothing if he needs coverage later in poor health.
Permanent coverage can make sense for a lifelong dependent (such as a child with a disability, often paired with a special needs trust), an estate large enough to owe estate tax, or a business arrangement. Those cases deserve a fee-only adviser or an attorney, not just the person selling the policy.
Laddering: let coverage shrink as needs shrink
Needs fall as the mortgage shrinks and children grow up. Instead of one $1 million 30-year policy, Sam could buy a $500,000 30-year policy and a $500,000 20-year policy. For the first 20 years he has $1 million; after that, $500,000 until the youngest is well into adulthood. Two policies cost less than one big long one, because the second half only covers 20 years. Price both ways before choosing.
What to skip, and why
| Product | The problem |
|---|---|
| Mortgage or credit life insurance | Pays the lender, and the benefit often shrinks with the balance. Plain term usually buys more for less. |
| Accidental death only | Pays only for accidents, which cause a small share of deaths. Read how the policy defines an accident. |
| Permanent life sold mainly as an investment or college plan | High costs and surrender charges in early years. A 401(k), IRA or 529 is usually cheaper. |
| Replacing an existing policy on a salesperson’s advice | You may lose cash value and restart a contestable period. The NAIC warns against switching without a careful comparison. |
| Pricey riders you will not use | Each rider adds premium. Waiver of premium and accelerated death benefit are the ones people most often keep. |
Buying, and what heirs should know
- Get quotes from several insurers for the same term and amount. Answer health questions truthfully: misstatements found during the contestable period, which your policy spells out, can lead to a denied claim.
- Check the insurer is licensed in your state through your state insurance department.
- Name a primary and a contingent beneficiary, and a trust or custodian rather than a minor child directly (see wills and beneficiaries).
- Tell your beneficiaries where the policy is. The NAIC runs a free Life Insurance Policy Locator for families who cannot find one.
Life insurance paid to a beneficiary because of the insured person’s death is generally not taxable income. Interest the insurer adds before paying, or on installments, is taxable.
- Why might a stay-at-home parent need life insurance? Answer: Replacing childcare and household work would cost the family real money.
- In the example, how much more coverage per premium dollar did term buy? Answer: About $1,515 per dollar versus about $69, roughly 22 times as much.
- What is laddering? Answer: Buying policies with different lengths so total coverage drops as needs fall.
- Is a death benefit paid to a beneficiary taxable income? Answer: Generally no, but interest added to it is.