Life Insurance and a Plan for the People Who Depend on You

Life insurance answers one question: if you died tomorrow, would the people who rely on you be able to keep their home, raise the children and stay on course? If nobody relies on your income or your unpaid work, you may not need it at all. If someone does, the amount is usually larger than people guess, and the cheapest way to buy it is usually the simplest. This chapter covers who needs coverage, how to work out how much, the choice between term and permanent policies, and the paperwork that decides whether the money reaches the right people.

Who needs life insurance, and who does not

Life insurance replaces economic value that disappears at death. You probably need it if any of these is true:

• Someone depends on your income: a partner, children, a parent you support.
• You share a debt that a survivor would struggle to pay alone, such as a mortgage.
• You provide unpaid work that would cost money to replace. A parent at home with young children provides childcare, transport and household management that a surviving partner would have to pay for.
• You own a business with partners, or have an estate that will need cash quickly.

You probably do not need it if you are single with no dependents and no co-signed debts, if you are retired and your savings and pensions would support a surviving partner, or if your savings are already large enough to support your dependents. Children rarely need coverage, because no one depends on their income.

How much: a needs analysis

Rules of thumb such as "ten times income" are a start, but they ignore what you already have and what your family would actually spend. A needs analysis works it out:

1. Income to replace. The yearly amount the family would need, for the number of years they would need it, for example until the youngest child finishes school.
2. Plus one-time costs. Debts to clear (often the mortgage), final expenses, and education you want to fund.
3. Less what already exists. Savings and investments the family could use, life insurance already in force (including through work), and Social Security survivor benefits for a spouse caring for children and for children under 18.

Replacing $4,500 a month for 20 years adds up to $1,080,000. A family does not need that whole amount on day one, though, because a lump sum keeps earning while it is paid out.

A death benefit of $900,000, invested at 6.0% with 3.0% inflation, can pay $54,000 in the first year and raise it with prices each year. In this example the answer to "does it last all 20 years?" is yes, and the highest steady payout rate that lasts the full period is 6.5%. The return assumed here is modest on purpose: the gap between a 6.0% return and 3.0% inflation is close to what safe money earns above inflation, and the 10-year Treasury real yield was 2.91% on September 29, 2026. Assuming a higher return makes the need look smaller but puts the family's money at more risk.

Add the one-time costs, subtract what you already have, and the result is the coverage gap. The life insurance needs calculator does this arithmetic with your own figures and also shows the year your savings could take over, which is when you would no longer need coverage. Life insurance proceeds paid because of death are generally not subject to federal income tax (Internal Revenue Code section 101(a)), so the full amount is available.

Term or permanent

There are two broad kinds of life insurance.

Term insurance covers you for a set period, commonly 10, 20 or 30 years, at a level premium. If you die during the term, it pays; if you outlive it, it ends with no value. Because most policies are never claimed, term coverage is far cheaper per dollar of protection than any other kind.

Permanent insurance (whole life, universal life, variable life) covers you for life and builds a cash value. Premiums are many times higher for the same death benefit, because they pay both for lifelong coverage and for a savings component inside the policy, net of commissions and charges. Surrendering a policy in its early years often returns far less than was paid in.

The need described above is temporary: it shrinks as children grow, debts fall and savings rise. That is why term coverage fits most families. The common alternative to permanent insurance is to buy term and invest the difference in premiums yourself.

If term coverage costs $250 a month less than a permanent policy with the same death benefit, and that amount is invested at 6.0% a year, it grows to $113,360 over 20 years, $53,360 of it from growth. The plan only works if the difference is actually invested, every month, through good markets and bad. Permanent insurance can make sense for a lifelong need: an estate that needs cash at death, a dependent with a disability who will need support for life, or business arrangements. Compare the two with your own quotes in the term versus whole life calculator.

Group coverage, laddering and conversion

Coverage through work is useful but rarely enough. It is often a multiple of one or two times salary, and it usually ends when the job does. Treat it as a supplement to coverage you own.

Two techniques make term coverage fit a shrinking need. Laddering means holding two or three policies with different lengths, for example a 30-year policy for the base need and a 20-year policy that expires as the mortgage and the children's dependence wind down, so total coverage falls as the need falls. Conversion is a feature of many term policies that lets you switch to a permanent policy without new medical questions, which protects you if your health changes.

Premiums depend mostly on age and health at the time you apply. Applying while young and healthy, comparing several insurers through an independent agent or broker, and answering every question accurately all help.

The paperwork that protects a family

A policy protects a family only if the money reaches the right person quickly. This part costs little and is often skipped.

• Beneficiary designations. Life insurance and retirement accounts pass to the named beneficiaries, whatever a will says. Name a primary and a contingent beneficiary for every policy and account, and update them after a marriage, divorce, birth or death.
• Minor children. An insurer will not pay money directly to a minor. Naming a trust or a custodian for the children avoids a court-supervised process.
• A will. It names a guardian for minor children, which no other document does.
• Powers of attorney and health care directives. They let someone you choose manage money and medical decisions if you are alive but unable to act, which ties back to the disability risk in chapter 4.
• A plain list of where things are. Policies, accounts, the will, and whom to call. Families often lose time, and sometimes benefits, because no one knew a policy existed.