Who needs life insurance?

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If you have ever said “I do” or welcomed a bundle of joy into the world, chances are you have considered purchasing a life insurance policy. Married couples and parents are among the best candidates for coverage.

But if you are single or childless, don’t automatically assume you don’t need life insurance, says Stephen Rothschild, chairman of the Life and Health Insurance Foundation for Education. “The reality is most people need life insurance,” he says. “A simple rule of thumb is that if someone will suffer financially when you die, you should be covered by life insurance.”

Life insurance can make sense even if you do not have dependents but simply want an additional potential source of cash, says Kristen Komer, a vice president with MetLife.
“People think of life insurance primarily to replace lost income or for a death benefit,” she says. “But there are so many other ways you can use life insurance.”

Following are five lifestyles that may require life insurance, even if you might not immediately think so.

Who needs life insurance the most?

There are five groups of people who could use life insurance the most:

1. Empty nesters

The kids may have grown up and gone to build their own lives, but it doesn’t mean you should cancel your life insurance policy. A policy can create a legacy of money you could pass on to heirs such as your kids, grandkids and so on.

Life insurance can help you provide for your kids and grandchildren. Wendy Boglioli, a spokeswoman for Genworth Financial, says: “We’re seeing an increasing number of retirees caring for their grandchildren. So, there is a financial need to take care of those children.”

Besides your descendants, think about your spouse — he or she may need income after you are gone. “If your spouse outlives you for 10 or even 30 years, would your current financial plan provide for them and ensure they can maintain the standard of living they’re accustomed to?” asks Rothschild.

2. Singles without children

One of the joys of single life might be having fewer responsibilities, especially financial obligations. So it may seem logical for singles to shrug off life insurance. There are a few reasons you may want to have life insurance when you’re single. Not all single people are footloose and fancy-free, Komer says. “A lot of singles are taking care of a parent,” she says. “You see that more often, as people are living longer.”

Or, perhaps your heart belongs to a charity – life insurance can help you leave it a legacy, Boglioli says. “By paying a little bit each month now, you can pay significant dollars upon your death to a charity that you care about,” she says.

Additionally, life insurance can cover your funeral costs and certain debt obligations, so loved ones will not have to pay those expenses after you’re gone.

And insuring yourself while you’re younger for such events makes financial sense. According to Rothschild, “If you’re young and healthy, you have a better likelihood of qualifying for a low rate,” he says. “It may make sense for you to lock in the premium.”

3. Small-business owners

Entrepreneurs tend to think of themselves as rough and rugged — self-made types. But now that you’ve gotten to where you are, there’s a team depending on you. That’s one reason you shouldn’t dismiss the idea of life insurance. Also, if you buy a permanent life insurance policy, you can borrow against the cash value for business expenses, says Komer. “If you had life insurance, you could fund a retirement plan for employees,” she says, adding that providing such perks can help retain good workers.

A life insurance policy can strengthen a business partnership by covering key persons or backing a buy-sell agreement. You could join your business partners in purchasing a life insurance policy that would pay out if one of you (or a key employee) dies. Those funds could then be used to buy out the deceased owner’s share of the business at a prearranged price or cover the expense of losing a valuable employee. “Life insurance for business needs can be complicated, so it is important to work with a qualified insurance professional or adviser who can review your options,” Rothschild says.

4. Retirees

Retirement is the time to relax, especially if your house is paid off and both you and your spouse are set with retirement income. But you may still need life insurance as a way to protect your heirs. Consider the following scenarios:

  • A policy could provide funds for your family to pay estate taxes and other expenses associated with your death, including funeral costs.
  • A life insurance policy can free retirees up to spend and enjoy their savings knowing their kids will receive a death benefit.
  • Retirees can use life insurance for what Boglioli characterizes as “estate equalization.”

For example, imagine a situation where a small-business owner has two sons and a daughter. The death benefit payout of a life insurance policy can compensate the kids who don’t receive the same amount of the business.

5. Stay-at-home parents

In a world of stagnating incomes, two-earner families have become more the rule than the exception. But there are still cases in which one parent works while the other looks after the children.

Couples in this situation often purchase a life insurance policy based on the working spouse’s income, but forget to account for the stay-at-home parent’s value. “I used to tell my husband while our kids were growing up, ‘If I died tomorrow, you would have to hire 10 people to do what I do,’” Boglioli says.

Life insurance could help pay for the services the stay-at-home parent currently provides, Rothschild says. “Consider what it would cost to fund child care, transportation, cooking, cleaning or any other household activity,” he says.

How much life insurance do you need?

There are several ways to calculate how much life insurance you need, based on the reason you’re buying it. You may want to tally the costs you’d like to cover when you’re gone, such as funeral services and your debt. Or maybe you’d like to pay for all your grandkids’ college, so you’ll need to estimate how much you think they would need.

If you’re buying life insurance as a replacement for the amount of money you contribute to the people who rely on you or you’re in business with, consider multiplying your salary or income by ten or twenty years, depending on what you can afford. Leaving behind ten years of the income your beneficiaries are accustomed to can make a big difference in their financial picture.

Frequently asked questions

Can I leave a life insurance payout to someone who is not a family member?

You can name a charity, company, boyfriend, neighbor or business partner as the beneficiary of your life insurance. You may choose more than one beneficiary and even change your mind several times.

Can I take out a life insurance policy on someone I’m not related to?

You can buy life insurance on business partners, employees and individuals you’re not related to. If you have partners, you could use life insurance to fund a buy-sell agreement if one of you passes.

Do I need life insurance if I’m young and single?

There is no better time to buy life insurance than when you’re young and single. The premiums will be far cheaper and will be locked in for the term you choose. You can always change your beneficiary in the future if you marry or have kids.

Written by
Cynthia Paez Bowman
Personal Finance Contributor
Cynthia Paez Bowman is a finance and business journalist who has been featured in Bankrate, Business Jet Traveler, MSN, CheatSheet.com, Freshome.com and TheSimpleDollar.com. She regularly travels to Africa and the Middle East to consult with women’s NGOs about small business development and works with select startups and women-owned businesses to provide growth and visibility.