Is Life Insurance Worth It?

Life insurance can sound very appealing. You pay premiums to the insurer, and your loved ones get a tax-free sum when you die to cover their expenses. However, is life insurance really worth it for you? You need to know that life insurance can be a really good idea depending on your personal finances.

If you have people who rely on you financially, a life policy can offer them support and a legacy when you pass away. A term life or permanent life insurance policy might be beneficial. But if you’ve already taken care of major financial responsibilities such as paying off your home or your children’s education, you might not need life insurance and could go for other financial plans instead.

Understanding Life Insurance

Life insurance is a deal or agreement between you and an insurance company. Just as I have mentioned above, you pay premiums, and in return, the company will then offer financial protection.

If you die while the policy is still on, your beneficiaries get a payout, also referred to as a death benefit. The best life insurance companies provide various types of products to suit every individual’s needs.

There are types of life insurance available, so you can choose the right one. The policy typically includes two main types: term and permanent.

Term Life Insurance

Term life insurance is a type of policy that covers you for a specific period, for example, 10, 20, or 30 years. Keep in mind that some policies can be as short as a few months or extend up to 40 years.

The premiums stay the same during the term. However, the older you become when you purchase the policy, the higher the premiums. Age is one of the biggest factors that affect premiums.

Usually, term policies are cheaper than permanent ones because they don’t have a savings or investment component referred to as cash value. Coverage will only apply if you die during the term. Once the term is over, the coverage is also over.

Permanent Life Insurance

Permanent life insurance is a type of policy that covers you for your entire life as long as you keep paying the premiums. These policies have a cash value component in which the part of your premiums goes into a tax-deferred investment account.

This can act like a savings account, whereby you can borrow or withdraw from it under specific conditions. Because of these features, permanent life insurance usually costs more than term life insurance.

Types of Permanent Life Insurance

• Whole Life Insurance: This typically offers fixed premiums and a cash value that grows at a set rate.
• Universal Life Insurance: This type of policy allows you to change or fix the premiums and death benefit. It offers flexibility as your financial situation changes. The cash value grows at money market rates, which could grow more compared to a whole-life policy.
• Indexed Universal Life Insurance: Links the cash value growth to the performance of specific financial indexes like the S&P 500.
• Variable Life Insurance: This policy lets you choose how to invest the cash value, for example, in stocks, bonds, or mutual funds. It can lead to higher returns. However, it can also come with the risk of reducing the death benefit if investments perform poorly.

By understanding these above-listed options, you can make an informed decision about which life insurance policy matches with your needs and budget.

Pros and Cons of Life Insurance

To decide if life insurance is a good idea, it’s important to weigh the pros and cons. While many people find the benefits worthwhile, it’s not for everyone. Here’s what to consider.

Pros

• Financial protection for loved ones.
• Variety of options. There are so many types of life policies to choose from. So you can find one that fits with your family’s needs and budget.
• Cash value.
• Tax benefits. Just as I have mentioned above, the cash value growth is tax-deferred, and beneficiaries don’t have to pay taxes on the death benefit. Unless the death benefit goes into a taxable estate, which can be avoided with effective planning.

Cons

• Cost to absorb. Life insurance adds an extra cost to your budget. Young families, in particular, might find it hard to manage this additional expense.
• Cost increases with age.
• Medical history affects quotes. Different health factors like obesity, high blood pressure, or smoking can make your life insurance quotes go high because they shorten your life expectancy.

When is Life Insurance Worth It?

Generally speaking, life insurance is generally worth it, and it is a good idea if your death would create problems for people you left behind financially.

Consider if:

• You want to cover your funeral costs.
• You want to replace your income. If your family relies on your salary, the policy can help support them once you pass away.
• You want to pay off debts

You might also get life insurance on someone else if their death would affect you financially. For instance, if you depend on your spouse financially, you purchase a policy on their behalf to help with living expenses if they pass away.

When is Life Insurance Not Worth It?

Life insurance might not be necessary if your death wouldn’t cause hardship for anyone financially.

Consider not getting life insurance if:

• No one depends on you financially: Instead of paying for a life insurance policy, you might be better off focusing on growing your own wealth if no one else needs the payout to survive.
• It’s not affordable for you: Only buy life insurance if the premiums fit into your long-term budget.
• You’re focused on building wealth. The main purpose of life insurance is to provide a payout to your beneficiaries when you die, not to serve as an investment.

Always keep in mind that all life insurance policies come with costs to cover insuring you. Talk to a financial advisor today about better wealth-building options that match with your financial situation.

Cost of Life Insurance

The cost of the policies depends on the insurance company you are going for, but several factors commonly affect premiums:

• Age
• Health and medical history
• Occupation
• Gender
• Lifestyle
• Policy type
• Amount of coverage

In some states, insurers also put your credit score into consideration when setting premiums.

Always keep in mind that every insurer has its own way of calculating prices. And different companies will have varied rates for term and permanent life insurance.

In order to find a policy at the best price for your needs and budget, it is advisable to work with an experienced independent life insurance agent or a financial advisor.