Calculating how much life insurance you need is both an art and a science.
As high-risk life insurance brokers, we consider several factors to make sure our client’s loved ones are adequately protected financially when they die.
However, what if you don’t have any debts?
Do I need life insurance if I have no debts? Yes, you need life insurance if you have no debts to replace your income during your working years and to cover your final expenses when you die.
In fact, the income replacement method is one of the easiest ways to determine how much life insurance you need.
The best life insurance companies use this calculation to determine the maximum amount of life insurance death benefits that you’re eligible for while you’re working.
Needing death benefits of $1 million or more is not unusual for the income replacement death benefit method.
Now that sound expense, but it really isn’t since term life insurance rates have plummetted in the past few decades.
See for yourself by using our free rate comparison tool that displays the rates of the top 50 life insurance companies in the United States.
Our article will cover the following topics, so skip ahead if you like.
- Debt Replacement Life Insurance Death Benefit Method
- Income Replacement Life Insurance Death Benefit
- Debt Replacement vs. Income Replacement Methods
- Final Thoughts on if You Need Life Insurance if You Have No Debts
Asking this question is not the out of the ordinary and part of the reason we dedicate our resources to helping explain.
In fact, in our life insurance for dummies post, you can likely find more helpful resources on the topic.
If not and that’s not what you are looking for, here are the details you need to know.
Debt Replacement Life Insurance Death Benefit Method
Lenders love life insurance because it ensures that all their loan is paid back in the event of premature death to the loan recipient.
Some lenders will even require that you have life insurance in place if your loan is unsecured, like a small business loan.
Although, you may not be mandated to buy life insurance for secured loans like your mortgage, which is secured by your home.
Even if your mortgage lender doesn’t mandate that you carry mortgage protection life insurance, you still should own it to guarantee a paid-off home when you die for your loved ones.
The way that you calculate a life insurance death benefit to replace your debts is somewhat simple.
Your life insurance death benefits should equal your debt balance.
If you need to repay your loan in 30 years, then you should buy a matching 30-year term durations.
For example, if you have a $500,000 30-year mortgage an appropriate amount of life insurance would be a $500,000 30-year term life insurance policy to repay your debts if you die.
Income Replacement Life Insurance Death Benefit
The income replacement death benefit calculations exclude your debts from your death benefit needs and instead focuses on replacing the income that you generate through your labor.
To calculate your death benefit, you would take your annual income and multiply it by the number of income-earning years you want to replace.
Income Replacement: (Annual Income) x (Number of Years to Replace) = Death Benefit
For example, let’s say you made $50,000 annual salary.
If you want to leave your family ten years of income, you multiply your annual salary ($50,000) by ten years to calculate your death benefit.
$50,000 x 10 years = $500,000 death benefits
So we have determined your death benefit needs, but how long of a term should you buy with the income replacement method?
Your term duration should ideally cover your working career.
The reasoning behind this is that once you retire from work, there is no more income left to replace.
Since it is difficult to determine when exactly we will retire from work, we recommend purchasing a term that will protect you into your mid-60s, such as age 65.
Now if you have a high income of over $100,000, 10x your income may look expensive.
However, the reality is that over 80% of consumers overestimate the cost of life insurance.
The reality is that term life insurance is the lowest it has ever been in history.
It seems that every year, a new life insurance company continues to lower its term rates.
Not only is life insurance getting more affordable, but it is significantly easier to purchase with the invention of no-exam term life insurance.
In fact, the best no-exam life insurance companies are finding ways to make their no-exam term life insurance more comparable in cost to life insurance that requires a medical exam.
Debt Replacement vs. Income Replacement Methods
Both life insurance death benefit calculations have their purpose, but of these two specific methods, we feel the income replacement method is a more versatile approach.
People with no debts wouldn’t need life insurance under the debt replacement method even if they have dependents or a spouse that rely on their income.
This can erroneously lead people to think that they don’t need life insurance if they have no debt, which couldn’t be further from the truth.
On the other hand, if you use the income replacement method, it would encompass more people that have a life insurance need, as long as they are generating an income.
Additionally, your replaced income can be used by your loved ones to maintain your debt payments, so it works regardless of if you have debts or not.
However, calculating a life insurance death benefit doesn’t have to be one or the other.
You could start with the income replacement method to get a minimum death benefit need if you were to die.
Once we have that minimum death benefit foundation, you can begin to add on your debts and payment obligations, such as higher education, in addition to your replaced income.
By including both income replacement and debt obligations to your total death benefits, you provide your family with maximum protection when you die.
Final Thoughts on if You Need Life Insurance if You Have no Debts
Life insurance is not just for people with debts.
If you have dependents relying on your income, then you need life insurance regardless of if you have debts or not.
The myth that you only need life insurance if you have debts sometimes comes from people’s understanding of how life insurance death benefits are calculated.
You can consider debts like your mortgage or future payment obligations like a college education for your children into your death benefit calculations.
However, the most valuable financial tool that you provide your family is your ability to generate income through your labor.
By starting with the income replacement method, you can determine a minimum foundational death benefit to protect your family.
We recommend replacing ten years of your income with term life insurance death benefits during your working years into your mid-60s, at which point you can reevaluate your life insurance needs.
If you are concerned about the cost, you may be shocked to learn how affordable life insurance is for people in fair or excellent health.
Use our free rate comparison tool to see the rates of the best life insurance companies on the market today.
If you have any questions on if you need life insurance with no debts, please contact us.
We’re happy to run through your personal situation with you.