Is Life Insurance Worth It?

lindsay giguiere, social security benefits

If you’re wondering if purchasing life insurance is worth it, you first need to understand what it is and what it does. Unlike auto insurance, which is mandatory in many states to drive legally, life insurance is up to you. Health insurance coverage is not required, however, it’s recommended.

Back to life insurance. Here are some interesting statistics according to Investopedia.

  • Only 54% of Americans have life insurance policies, compared to 63% a decade ago.
  • Currently, about 60 million American households are either underinsured or uninsured, industry experts say.
  • About 44% of families say they would face financial hardship in the next six months if their primary wage earner were to die.

What Does Life Insurance Do?

Life insurance helps families to survive the loss of income when one of the breadwinners passes away. It is vital to prepare yourself ahead of time so you don’t have to stress when that time comes. 

After you reach an agreement with a life insurance carrier, you’ll pay them a premium. Normally you pay in installments, either monthly, quarterly, annually, or whatever schedule you agree to.

In exchange, the insurance company pays your beneficiaries a lump sum of money in the event of your death. It’s called a death benefit. Your children, surviving spouse, or other recipients can spend the money however they’d like.

Today, you can choose to have your death benefit issued in installments or annuities. These models ensure that your beneficiaries get income at regular intervals for many years and are set without worries. If we look back at the statistics, all those people who do not have life insurance are going to be left with a large deficit of income, which is very concerning.

Let’s explore the different types of life insurance to understand more about the benefits and reasons why some choose not to stay ahead of the game. 

What Is Term Life Insurance?

Term life insurance covers a certain time frame, usually in multiples of 5 or 10 years. Most policyholders go for terms of 10, 15, 20, or 30 years.

If the policyholder dies before the end of the agreed term, their beneficiaries receive the death benefit payout. If the term expires and you’re fortunate enough to still be alive, you may renew the policy, although you’ll probably be charged a different premium to account for your current age.

What is Permanent Life Insurance?

Permanent life insurance never needs to be renewed. It doesn’t expire unless you stop paying the premium installments. Your beneficiaries get the death benefit after you pass on, just like term life insurance.

On top of the death benefit, permanent life policies usually have a savings component called cash value. As you pay off your premium, the cash value of your policy increases tax-free. You may be allowed to borrow money against the cash value of your policy. Or you may choose to pass it on to your heirs together with the death benefit.

A permanent life insurance policy like this is called a whole life policy. There’s another option, known as universal life that offers additional investment strategies and flexible premium payments. Universal life policies accumulate value in line with the insurance company’s stock portfolio. Like whole life policies, you can borrow money against a universal policy’s cash value.

What Are the Benefits of Life Insurance?

The most obvious benefit of life insurance is that it takes care of your survivors after you pass away. There may be medical bills to pay off and funerals are not cheap. The death benefit can be used to pay these expenses without leaving family to find the money to do so. 

The death benefit can also settle outstanding debts and replace lost income. Many beneficiaries use their payouts to take care of mortgages and college tuition. It’s a scary thought but where would this money come from if not for life insurance?

Death benefits are tax-deferred, so your beneficiaries won’t have to bear that fiscal burden. Permanent life policies also earn money, much like an interest-bearing savings account and you can borrow money against this extra value.

You may also be able to attach riders to a life insurance policy. Riders add terms and conditions that aren’t covered in the original policy. These may include disability insurance, long-term care provisions, the option to convert a term policy to a permanent one, and other conditions.

What Are the Disadvantages of Life Insurance?

As you might expect, the major drawbacks to life insurance are financial. Policy premiums can be expensive when you get older and less healthy. That’s precisely the time when you’d need a policy the most. Life insurance is much more affordable when you’re young, active, and problem-free, however, it’s a time you’re probably not thinking about life insurance. 

Whole life policies are always more expensive than term policies. The high premiums for a permanent life policy put it out of reach for many average working families, hence the stats above. 

Additionally, the cash value element of a whole life policy isn’t always the best investment vehicle. On average, the rate of return is far less than what you’d earn in a retirement account or a 401(k) plan.

How Much Are Life Insurance Premiums?

Life insurance premiums are tailored to the unique situation of each policyholder, therefore there isn’t just one answer. They vary depending on the owner’s age, sex, health, lifestyle, and location. Coverage terms and conditions also play a part in calculating the premium.

For at least some guidance, Business Insider provides a few averages for current insurance policy premiums:

  • Whole Life Insurance: $52 monthly
  • Universal Life Insurance: $55 monthly
  • Term Life insurance: $53 monthly

Again, these are just averages. You may be able to find online tools that will help you to determine how much you’ll actually pay. Or you can simply speak to an insurance agent in person (how nostalgic!).

The Verdict: Is It Worth It To Get Life Insurance?

So is a life insurance policy worth the expense? 

Life insurance is essential if you have children. Losing a parent while they’re young is one of the most harrowing things that a child can go through. The emotional devastation is made worse when kids don’t have the financial resources to live. Life insurance payouts can help them to stay afloat.

If you have a spouse or domestic partner, with or without kids, life insurance is a good idea. Death benefits will help them to get along when your income stream stops. They can retain the lifestyle they currently have and can put money toward paying down long-term debts, especially mortgages.

This doesn’t mean that life insurance is pointless if you’re unattached and have no children. You can designate anyone to receive death benefits, even a charitable organization. These benefits can certainly help whoever you care for. Another option is to establish a trust along with a will that dictates where the money will go.

A term life insurance policy is the better option for typical working policyholders and they’re generally the most affordable. Permanent life insurance plans are more suitable for the very wealthy, simply because they’re more expensive and never expire.

When it’s time to think about life insurance, don’t wait. While it may not be on your radar today, it should be in the near future. Your loved ones will depend on it and you’ll know that long after you’re gone, your family is taken care of. A morbid thought but an essential one!

Hope You Enjoyed the Read!

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Authored By: Lindsay Giguiere

Lindsay is an entrepreneur, influencer, and advocate with a passion to help women and their loved one’s thrive beautifully.

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