Is Life Insurance Worth The Cost?

Life insurance is a valuable financial tool that can provide a safety net for your loved ones after your death. It's not an investment per se, but it can be a strategic addition to your financial plan, especially if you have people who rely on you financially.

The two main types of life insurance are term life insurance and permanent life insurance. Term life insurance is generally more affordable and provides coverage for a specific period, such as 10 or 20 years. On the other hand, permanent life insurance offers lifelong coverage and includes a cash value component that can be borrowed against or withdrawn.

When deciding if life insurance is worth it, consider your financial situation, budget, age, and policy options. If you have loved ones who depend on your income, life insurance can ensure they are financially protected. It can also help cover funeral costs, pay off debts, and support children or relatives. However, if you don't have dependents or your budget is tight, life insurance may not be a necessary expense.

Ultimately, the decision to purchase life insurance depends on your personal circumstances and financial goals. It's essential to weigh the pros and cons and consult with a financial advisor to make an informed choice.

When to get permanent life insurance

Permanent life insurance policies are designed to last a lifetime and are a good option for anyone who wants lifelong coverage and a cash value component. Here are some scenarios where permanent life insurance might be a good fit:

Families with young children

Permanent life insurance can provide a death benefit to support children's education and living expenses if a parent passes away. This ensures financial stability for your family during critical years.

Business owners

Permanent life insurance can be used to fund buy-sell agreements, provide key person insurance, and offer employee benefits. It helps maintain business continuity and protect the company's financial health.

High-net-worth individuals

Permanent life insurance can be used to pay estate taxes, provide liquidity for heirs, and offer a tax-efficient way to transfer wealth. It helps ensure that your estate is preserved and passed on according to your wishes.

Individuals with special needs

Permanent life insurance can be used to provide a death benefit to support individuals with special needs, ensuring they have financial support even after their caregiver is no longer there to provide for them.

Older individuals

While permanent life insurance is generally more expensive than term life insurance, it may be a good option for older individuals who want to ensure they have coverage for their entire lives. Permanent life insurance policies do not expire as long as premiums are paid.

When to get term life insurance

Term life insurance is a type of insurance that covers a policyholder for a set period, typically 10 to 30 years. If the insured person dies within this period, their beneficiaries will receive a death benefit. However, if the insured person doesn't die during this period, the policy lapses, and there is no payout.

• When you have financial dependents: If someone relies on your income, such as a spouse, children, or elderly parents, term life insurance can provide financial protection for them if you pass away. It can help replace your income, pay for household services, or cover education costs.
• When you have significant debts or financial liabilities: Term life insurance can help cover any debts or financial liabilities that your loved ones might be responsible for after your death. This includes mortgage payments, credit card debt, or private loans.
• When you are a homeowner with a mortgage: A term life insurance policy can help ensure that your spouse or beneficiaries are not burdened with mortgage payments if you pass away.
• When you want to leave an inheritance: If you want to leave an inheritance for your children or grandchildren, term life insurance can provide a tax-free lump sum payout to your beneficiaries.
• When you are a business owner: Term life insurance can help ensure business continuity by providing financial support to your business partners or heirs in the event of your death.
• When you are a young adult: The younger and healthier you are, the lower your insurance premiums will typically be. Getting term life insurance early on can help lock in lower rates for the duration of the policy. This is especially beneficial if you plan to start a family or have financial dependents in the future.
• When you are planning to start a family: As a new parent, your financial obligations and responsibilities increase. Term life insurance can provide financial security for your spouse and children if something happens to you.
• When you have specific short-term needs: Term life insurance is ideal for temporary coverage during specific periods, such as when your children are young or when you have a large debt like a mortgage that you want to ensure is covered.
• When you want affordable coverage: Term life insurance is generally more affordable than permanent life insurance. If you are on a tight budget, opting for a term policy can provide you with necessary coverage at a lower cost.

When life insurance is not worth it

When is life insurance not worth it? Well, if your death wouldn't leave someone in a financial bind, then you may not need it.

Consider skipping life insurance coverage if:

• No one relies on you financially: If you don't have any dependents or people who rely on your income, then you may not need life insurance. Your money could be better spent building your own wealth rather than paying premiums for coverage that isn't necessary.
• It's not in your budget: Life insurance is only worth it if you can afford the premiums long-term. If the cost of coverage is a strain on your finances, it may not be a wise investment. Permanent policies can last a lifetime, and term life policies can be lengthy, so missing payments could cause your policy to lapse, leaving your beneficiaries with nothing.
• Your primary goal is to build wealth: While some permanent life insurance policies offer cash value components, their primary purpose is to pay a sum to your beneficiaries upon your death, not to build wealth. If wealth accumulation is your main goal, speak to a financial advisor about alternative investment opportunities.
• You have sufficient savings or assets: If you have enough savings or assets to cover your financial obligations after your death, you may not need life insurance. This is especially true if your only goal is to leave an inheritance, as there may be more profitable ways to invest your money.
• You have adequate coverage through work: If you already have sufficient life insurance coverage through your employer, purchasing additional coverage may not be necessary. However, keep in mind that group life insurance policies often have coverage limits and may not be maintained if you leave your job.
• You're young and healthy: If you're young and in good health, the cost of permanent life insurance may outweigh the benefits. Term life insurance is usually more affordable and can provide coverage during the years when you're more likely to have financial dependents.

Remember, life insurance isn't an investment vehicle; it's a way to protect your loved ones financially in the event of your death. If your death wouldn't create a financial burden for others, then life insurance may not be the best use of your money.

Pros and cons of permanent life insurance

Permanent life insurance policies typically last your entire life and have a cash value component that grows over time. This cash value can be used to pay premiums or take out a loan from the insurer. However, permanent life insurance policies have much higher rates than term policies. Here are some pros and cons of permanent life insurance:

Pros

• Lifelong coverage: Permanent life insurance policies provide coverage for your entire lifespan, as long as premiums are paid.
• Cash value: Permanent life insurance policies have a cash value component that you can withdraw or borrow against while you're still alive.
• Tax benefits: The cash value of permanent life insurance policies grows tax-deferred, and there are no taxes when receiving dividends or surrendering coverage.
• No approval process for loans: You can borrow against the policy's cash value without needing approval.

Cons

• High cost: Permanent life insurance rates are significantly higher than term life insurance due to the lifelong coverage and investment opportunities.
• Risk and careful monitoring: Universal and variable policies require careful monitoring to ensure the cash value performs well and the policy stays in force.
• Loan deductions: If you borrow from the cash value and don't pay it back, the insurer typically reduces the death benefit by the same amount.
• Maturity dates: Some policies have maturity dates, and if you live past this date, you may lose coverage and receive little cash value in return.

Pros and cons of term life insurance

Term life insurance is a type of insurance that covers a policyholder for a set period, typically 10 to 30 years. If the insured person dies within this period, their beneficiaries will receive a death benefit. If the insured person doesn't die during this period, the policy lapses, and there is no payout.

Pros of Term Life Insurance

• Term life insurance is relatively accessible, with many insurance companies selling term life insurance products.
• It is a good option for those looking for affordable, temporary coverage.
• It is generally cheaper than permanent life insurance.
• It is straightforward to understand.
• It offers flexible coverage options with various term lengths and coverage amounts.
• It provides predictable premiums, making budgeting easier.
• It can cover specific financial responsibilities, such as a mortgage, education expenses, or other debts.
• Certain term policies offer renewal or conversion to permanent insurance at the end of the term, providing flexibility to extend coverage or transition to permanent insurance without needing a medical exam.

Cons of Term Life Insurance

• It does not build cash value or serve as an investment.
• If you choose to renew your term life policy after the initial term ends, the premiums are typically recalculated based on your current age and health, which can be significantly higher.
• It is relatively inflexible compared to permanent policies, which offer various riders and options for adjusting coverage.
• There is no return on premiums if the policyholder outlives the term.
• The cost and availability of term life insurance are primarily based on your health and age at the time of application. Individuals with significant health issues may face higher premiums or be denied coverage altogether.
• Because term life insurance is intended to cover specific periods and financial obligations, it may not address long-term or permanent needs.
• The policyholder risks outliving the term and facing difficulties obtaining new coverage due to age or health, leaving them vulnerable when they still need financial protection.

Frequently asked questions