Do you actually need life insurance?

Before we look at policies, I’d start with a different question: What would happen financially if you died?

Would your family have enough to maintain their lifestyle? Pay off the mortgage? Fund college? If you own a business, would your partners need cash to buy your share? Could your estate create a tax bill without enough liquid assets available to pay it?

If your existing assets can already cover those needs, you may need less insurance—or none at all. That’s why I don’t think the decision should start with a policy. It should start with figuring out what, if anything, needs to be insured.

At Monument, that’s where our role starts. We don’t sell insurance or receive commissions for recommending insurance products. We help clients determine whether they need coverage, how much they need, and what they need it to accomplish. If insurance makes sense, we can then coordinate with an independent insurance professional to find the right coverage.

Is Life Insurance a Waste of Money?

It can certainly feel that way. You could pay premiums on a term life insurance policy for 20 or 30 years, never use it, and receive nothing back when the term ends. But that’s also how insurance is supposed to work. You’re paying an insurance company to take on a financial risk that you don’t want your family, business partners, or estate to have to absorb on their own.

If your death would leave your spouse unable to cover household expenses, for example, life insurance can replace some of the income your family would lose. If your assets could already support your family without your income, you may not need insurance for that purpose.

So before deciding whether life insurance is worth paying for, figure out what financial problem the policy needs to solve.

When Life Insurance Can Make Sense

There are several common reasons we see people use life insurance.

Income replacement. If your family depends on your earnings, life insurance can provide money to cover living expenses after your death. This can be particularly important when you have young children, significant debt, or many working years ahead of you.

Estate liquidity. A wealthy family can have a large net worth without having a lot of cash readily available. Businesses, real estate, and concentrated stock positions may represent significant value but can be difficult or undesirable to sell quickly. Life insurance can provide liquidity for taxes and other estate expenses. For 2026, the federal estate tax exemption is $15 million per individual, although state estate taxes and individual circumstances can also matter.

Business succession. Life insurance is frequently used for funding a buy-sell agreement. If one owner dies, the death benefit can provide funds for the remaining owners or the business to purchase that person’s interest.

Estate equalization. Suppose one child plans to take over the family business and another doesn’t. Life insurance can sometimes be used to provide an inheritance to the other child without requiring the business to be divided or sold. It can also play a role in passing wealth to future generations.

Tax treatment of the death benefit. Life insurance proceeds paid to beneficiaries are generally not subject to federal income tax. Estate tax treatment is a separate issue, which we’ll cover below.

When You May Not Need Life Insurance

There are also plenty of situations where paying for additional coverage doesn’t make sense.

No one depends on your income. If no one would experience a meaningful financial loss if you died, you may not need income-replacement coverage.

You have enough assets to cover the need. As your portfolio grows, you may reach the point where your family could maintain its lifestyle without your future earnings. In that case, you’ve effectively self-insured that particular risk. That doesn’t necessarily mean you have no use for life insurance. A policy could still have an estate-planning or business purpose. But the amount and type of coverage you need may change.

You’re paying for permanent coverage when the need is temporary. Permanent insurance can be significantly more expensive than term insurance. If you primarily need coverage until your children are independent or your mortgage is paid off, it may not make sense to pay for a policy designed to last your entire life.

Your existing policy no longer matches your life. Maybe you bought coverage when your children were young and your mortgage was much larger. Twenty years later, your assets, debts, income, and family needs could look completely different.

I think insurance is worth revisiting periodically for exactly this reason. The policy may not have changed, but the financial need it was originally meant to address probably has.

How Much Life Insurance Do You Need?

I’d start by looking at a few basic numbers:

• How much income would your family need to replace?
• For how many years?
• What debts would you want paid off?
• Are there education expenses you’d want funded?
• Are there estate taxes, business obligations, or other expenses that would require cash?
• How much do you already have in savings and investments?

This is easier to see with actual numbers.

Assume a 45-year-old executive earns $300,000 and has a spouse, two children, a $900,000 mortgage, and $1.5 million in investable assets.

Suppose the family determines it would want approximately:

• $2 million to help support family spending over the next 10 years
• $900,000 to pay off the mortgage
• $400,000 for future education expenses

That’s approximately $3.3 million.

If $1.5 million of existing investments is available to help meet those needs, the remaining gap would be roughly $1.8 million.

Now we have something useful to evaluate: How should this family cover an estimated $1.8 million need, and for how long does that need exist?

The calculation would be more detailed in real life, but this is how I’d want to approach the decision. Calculate the need first. Then evaluate the policy.

Term vs. Permanent Life Insurance

Once you know why you need insurance, you can start evaluating what kind of policy could fit.

Term insurance is generally the simpler structure. You pay a premium for coverage over a specified number of years. If you die while the policy is in force, your beneficiaries receive the death benefit.

Permanent insurance is designed to last for life, assuming the policy remains adequately funded and in force. It can also accumulate cash value.

There are several types of permanent insurance. Whole life, universal life, indexed universal life, and variable life policies can work differently, so it’s important to understand the specific contract rather than treating “permanent life insurance” as one product.

Is Life Insurance a Good Investment?

This is where I’d want to slow down and look at the numbers.

Permanent life insurance can accumulate cash value, and that cash value can receive favorable tax treatment when the policy is properly structured and maintained. That doesn’t automatically make life insurance the best place to invest additional money. If the tax treatment is one of the main reasons you’re considering the policy, I’d want to understand exactly what you’re getting in exchange for the premiums.

What are you paying each year? What portion is going toward insurance costs and other expenses? How quickly does cash value accumulate? Which assumptions in the policy illustration are guaranteed, and which aren’t? What happens if you stop paying premiums? How accessible is the cash value? And what could those same dollars potentially accomplish elsewhere in your financial plan?

Variable life policies are securities, and their cash values can fluctuate based on the performance of the underlying investments. FINRA provides additional information about insurance products and their investment features here. There can also be different tax consequences if a policy becomes a modified endowment contract, or MEC.

This is why I wouldn’t evaluate permanent insurance based on the tax benefits alone. We’d want to understand the insurance need, the costs, the tax treatment, and the alternatives before deciding whether the policy makes sense.

How Is Life Insurance Taxed?

The tax treatment of life insurance is one reason permanent policies can look attractive. But there are several different tax rules involved, and they don’t all work the same way.

Death benefits are generally income-tax-free. Beneficiaries generally don’t include life insurance proceeds in taxable income.

Cash value can grow tax-deferred. Depending on how a permanent policy is structured, you may also be able to access cash value through withdrawals or policy loans without immediately recognizing taxable income. But this is an area where the details matter. Withdrawals, loans, a policy lapse or surrender, and modified endowment contract status can all affect the tax outcome.

Estate taxes are different. A death benefit can be free of income tax and still be included in your taxable estate.

Ownership matters here. In some situations, families use an irrevocable life insurance trust, or ILIT, to keep life insurance proceeds outside the insured’s taxable estate. There are specific rules around ownership and transfers, so this should be coordinated with an estate-planning attorney.

Life insurance is only one piece of broader estate planning. I’d want the ownership of the policy, the beneficiary designations, and the rest of the estate plan working together—not evaluated separately.

Does Life Insurance Still Make Sense Once You’re Wealthy?

Sometimes. But the reason for owning it may change.

Early in your career, the biggest risk may be the loss of your future income. You might need several million dollars of coverage because your family hasn’t yet accumulated enough assets to replace decades of earnings. Twenty years later, you may have a portfolio large enough to support your family without any insurance proceeds. At that point, you may decide you don’t need as much coverage.

Or a different need may have emerged.

Perhaps your estate has grown large enough that liquidity is becoming important. Maybe most of your wealth is tied up in a business. Perhaps you want to equalize inheritances among your children or leave a specific legacy.

This is why I wouldn’t assume that getting wealthier automatically means you need more—or less—life insurance. I’d go back to the numbers and ask what financial need the policy is covering today.

Common Questions About Life Insurance

Is life insurance a waste of money?

Not necessarily. If someone depends on your income or your death would create a financial obligation that your existing assets can’t comfortably cover, insurance can transfer that risk to an insurer. If there isn’t a meaningful financial need to insure, paying premiums may not make sense.

Do I still need life insurance if I have significant savings?

Maybe not for income replacement. If your existing assets could comfortably support your family, that need may have disappeared. Insurance could still be useful for estate liquidity, business succession, or other planning purposes.

Is term or permanent life insurance better?

Neither is universally better. Term insurance is generally less expensive and can work well for temporary needs. Permanent insurance can make sense when the need for coverage is expected to last for life. The right choice depends on what you’re trying to insure.

Are life insurance payouts taxable?

Death benefits are generally not subject to federal income tax when paid to beneficiaries. However, the death benefit may be included in the insured’s taxable estate depending on ownership and other circumstances. Your attorney and CPA can help you evaluate the estate-tax implications.

When is life insurance not worth it?

If no one depends on your income, your assets can comfortably cover your family’s needs, and you don’t have an estate, business, or legacy reason for the death benefit, you may not need coverage.

What to Do Next

Life insurance isn’t something I’d recommend buying—or keeping—without knowing what you need it to accomplish.

If you bought a policy 15 or 20 years ago, the reason you bought it may no longer exist. Your kids may be grown. Your mortgage may be smaller. Your portfolio may now be large enough to support your family without additional insurance.

Or the opposite may be true. Your estate may be larger, you may own a business, or you may now have estate-planning needs that didn’t exist when you first bought coverage.

At Monument, we review insurance as part of risk management planning. We don’t sell insurance or receive commissions from insurance products. We can help determine whether you need coverage, how much you need, and what role it should play alongside the rest of your financial plan. When a policy makes sense, we can also coordinate with an independent insurance professional, your CPA, and your estate attorney to make sure the pieces work together.

If you’d like us to take a look at the coverage you already have—or help you determine what you actually need—you can start with a Complimentary Wealth Check.

Let’s talk.

 

¹ This example is hypothetical and for illustration only. It does not represent any actual client, policy, or outcome; individual coverage needs and results will vary based on income, obligations, assets, health, policy pricing, and personal circumstances.

Note: Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Please consult your CPA for tax advice.

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