Life insurance can fill a wide variety of needs, including covering the finite years of a mortgage and protecting the interests of a special-needs child who will need financial support after you’re gone.
In fact, 63% of Americans consider life insurance a necessity, according to the nonprofit industry group Life Happens. But 30% say they don’t have enough coverage, 19% have only group life insurance (the coverage that’s available through work and often doesn’t provide enough money to meet a family’s needs), and 43% have none at all, according to Life Happens and industry group LIMRA.
Here’s a guide to who needs life insurance and what kind of policy likely works best in each situation.
| Situation | Notes | Best options |
|---|---|---|
| Breadwinner | Life insurance can provide “income replacement” so that your family can continue to pay everyday expenses. | Term life insurance can cover your working years. |
| Stay-at-home parent | Life insurance would cover the cost of paying for services the parent does for “free,” such as child care. | Term life can cover the years your kids are young. |
| Divorced parent | A policy could cover the support payments that a divorced parent makes. | Term life can cover the years of support payments. |
| Parent of a special-needs child | Life insurance can make sure the child will have financial support no matter when a parent dies. | Permanent life insurance provides a payout no matter when you die. |
| Homeowners with a mortgage | A policy can cover mortgage payments, so your family doesn’t have to move if you die. | Term life insurance can match the years of a mortgage. |
| Someone with co-signed debt (such as student loans or credit cards) | Life insurance could cover the cost of the debt. | Term life can be timed to end with the debt payments. |
| High net worth individual | Life insurance can provide funds for heirs to pay estate or inheritance taxes. | Permanent life insurance is best for those with estate tax concerns. |
| Someone who wants to provide an inheritance | If you don't have a lot of wealth, life insurance can provide a small inheritance to heirs. | Permanent life insurance will pay money for the inheritance, no matter when you die. |
| Business owner | Life insurance can pay off business debts if you die, help heirs to the business pay off estate taxes, or fund a buy-sell agreement that allows a business partner to buy out your share. | Term life or permanent life, depending on the issue to be solved. |
| Investor who has maxed out other retirement plans | Life insurance with a cash value component can provide a supplemental source of retirement savings. | Permanent life insurance, which builds cash value that you can access. |
| People concerned about paying for their own funerals. | Small life insurance policies can pay for your funeral and final expenses. | Permanent life, such as final expense insurance. |
NerdWallet’s life insurance comparison tool can help you figure out how much coverage you need and compare rates. People who are interested in permanent life insurance should consult a financial advisor to find the right policy type.
Aubrey Cohen is a staff writer at NerdWallet, a personal finance website. Email: acohen@nerdwallet.com. Twitter: @aubreycohen.
Image via iStock.
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