Should I have life insurance?

• Working adults and stay-at-home parents can benefit from life insurance.
• Life insurance is important for high earners and buyers living paycheck to paycheck.
• Life insurance may be cheaper than you think.

I vividly remember the moment I realized I needed life insurance. I was around seven months pregnant, with a huge belly, a baby on the way, and a new house under renovation. As my husband and I sat at a conference table drawing up our wills with a lawyer (another must if you have children,) I sat up straighter with a start.

Sure, we could set up a will to dictate who would care for our children in the event of our deaths, but how would we ensure the money was enough to meet their needs?

Enter life insurance.

Life insurance is an agreement between an insurance company and a policy owner that guarantees the insurer pays a previously agreed-upon amount of money in the event of the insured’s death. There are two common types of life insurance: term and permanent, though there are various other types of policies under those umbrellas.

Term policies cover death for a certain number of years, such as 10, 20, or 30. After that, the policy expires. Most companies offer the option to convert the term policy to a permanent policy pending underwriting approval. Term life insurance policies are generally affordable, with higher payouts during the fixed term for most people. Permanent policies only lapse if you miss payments without additional riders to protect you, though it is generally more expensive early on. Much like a 401K or other financial vehicles, the earlier you contribute, the less you pay each month. Once your term expires, your premiums will inevitably increase while your eligible coverage decreases.

What you choose depends on various factors, including age, health, number of dependents, lifestyle, and budget. If you’re a single parent or have a partner who stays home to take care of the kids, you may want to buy more coverage to help your loved ones find their footing if you pass unexpectedly. Similarly, stay-at-home parents should account for the impact of the sudden cost of child care, cleaning, and other household services.

So now that you know the basics of life insurance, you’ll need to determine if life insurance is the right choice for you. Read on to learn who should have life insurance and why.

You’re the primary earner in your family

Just 52% of Americans have life insurance, according to information from the Life Insurance Marketing and Research Association (LIMRA). But if you’re the primary earner in your family, life insurance is a must.

You can get a policy through your employer, but it usually only covers a year’s wages. That’s why you might double up on policies via your employer and a more comprehensive policy from an outside insurer. We love our life insurance policies from Costco, but there are many options to obtain an additional policy.

You’re a stay-at-home parent

While securing a life insurance policy may be a no-brainer for your family’s primary earner, don’t forget about stay-at-home parents. The estimated annual cost of childcare for an infant is about $16,000. Multiply that number if you have multiple children. So covering the cost of childcare in the event of a stay-at-home parent’s death makes financial sense. It’s easy for families to undervalue home-related tasks because it always gets done, and we don’t technically spend money on it. Unfortunately, the value of keeping a household becomes painfully apparent when a parent who is primarily at home passes away suddenly.

You have a special needs dependent

Those with children with special needs or disabilities also need life insurance policies to cover their children’s cost of care after their death. But don’t make the child the beneficiary. Instead, appoint a trusted advisor or executor to make decisions and make the appropriate payments. Some states have robust programs to care for individuals with approved disabilities. It’s best not to leave it to chance, though. Unfortunately, life is unpredictable, and even in states like Washington, that can translate to unexpected tragedies and people with disabilities who fall through the cracks without a direct advocate.

This doesn’t just apply to children. You need life insurance if you have any dependent who requires long-term care, whether a spouse, sibling, or child. Particularly for parents, though, a generous whole life insurance policy may make more sense as it may cover a child with severe challenges well into adulthood regardless of when the parent passes away.

You have cosigned loans or credit cards

Asking someone to cosign on a student loan, car loan, or credit card is a big ask. So you want to avoid sticking them with your debt if you unexpectedly pass away. A life insurance policy that will cover the cost of the loans is a smart financial move. Cosigned loans also include mortgage loans. Even if your life insurance policy doesn’t pay off your mortgage in its entirety, it could reduce the balance to make a refinance more plausible without your income.

This also applies to deceased parties with private student loans. While the government forgives federal loans once the borrower dies, private companies do not. And let’s be honest, the last thing you want to do is leave your surviving kin with unpaid student loans. Ouch.

You own a small business and want to pass it down

Small business owners need life insurance policies. When you die, your beneficiaries may pay estate tax on business proceeds. A seasoned tax professional can minimize the burden for beneficiaries, but a generous life insurance policy will go a long way to improving the experiences of loved ones. A substantial life insurance payout can also supplement costs while your beneficiaries restructure the business to account for the tasks you previously completed. So if you own a small business and want to pass it along to your children or other family members, you should have a life insurance policy that covers that estate tax so they’ll be financially stable in the event of your death.

This also applies to small business owners with partners, who should also have written agreements to allocate business assets. A clear-cut will or trust will go a long way toward reducing stress across the board.

You have a high net worth

If you have a high net worth, chances are, you plan to pass down part, if not all, of your assets. A life insurance policy can help cover estate taxes on these assets and incidental legal costs. Alternatively, a life insurance policy can also help avoid an inheritance tax, a government tax paid on money or assets received from a deceased person.

A tax professional can advise your beneficiaries on the most efficient ways to distribute the funds and pay taxes. The higher your net worth, the more your recipients could spend closing out your affairs. A strong life insurance plan could make this process easier while helping loved ones maintain a similar standard of living.

Is life insurance the sexiest financial topic in the world? Unfortunately, no. But is it necessary for financial peace of mind in the event of your death? Absolutely.