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Is life insurance worth it?

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While nearly 60% of American adults have some type of life insurance coverage, you may still wonder if the benefits make up for this ongoing expense. Life insurance has the ability to provide financial peace of mind for you and your family, whether impacted by a sudden or expected death. If you’re wondering, “should I get life insurance,” start by exploring common scenarios for using these funds to see if the benefits match up with your own financial needs.  

What is life insurance

Life insurance is a type of financial planning that provides your beneficiaries with a death benefit if you pass away during your covered period. In order to purchase the policy, you’ll need to pay a premium for the length of the term, often either monthly, quarterly or annually. Missing payments could result in a nullified life insurance policy. 

There are several types of life insurance to choose from based on your needs. The two primary categories are term or permanent. Term life insurance gives you coverage for a set period of time. Your beneficiary only receives the death benefit if you pass away during that time. Permanent life insurance lasts your entire life. It typically comes with a cash value that may be invested, depending on the structure of your policy. 

Is life insurance worth it?

Life insurance does come at a price, so it’s smart to evaluate your circumstances to determine whether or not the cost is worth the benefit. As you get older, life insurance policies become more expensive, since the likelihood of passing away increases over time. You may consider locking in a lower price when you’re younger. Term life insurance is usually the most affordable option since it only lasts somewhere between one and 30 years and provides coverage for when your dependents are likely to need it most. 

Permanent life insurance lasts the entirety of your life, helping you avoid higher premiums if you purchase it sooner rather than later. Plus, this type of policy comes with a cash value component. You may be able to tap into the funds for your own financial needs further down the road. 

Who needs life insurance

Life insurance is best suited for individuals who have others dependent upon them. For example, if you have a spouse or kids who depend on you for income or care, a life insurance policy gives them financial security in the event you pass away. 

Common uses for the death benefit include paying for final expenses, settling outstanding debts, helping your family after your income is lost (from a job, Social Security or other source), providing your heirs with an inheritance and paying off estate taxes.

Pros and cons of permanent life insurance

Permanent life insurance comes with both benefits and downsides to consider before taking out a policy. 

Pros

There are several advantages of purchasing a permanent life insurance policy. One is that there’s no age limit on your coverage, as long as you keep up with your premiums each year. The cost doesn’t rise, so your premium stays the same even as you age. Additionally, the cash value of your portion of your account is tax-deferred until you make withdrawals, similar to IRA and 401(k) funds. You may also be able to borrow against this part of your plan without paying a penalty fee. 

Cons

If you do choose to borrow from your permanent life insurance policy, you will typically have to pay interest. You’ll also risk losing coverage if you lapse on your payments at any point. One potential use for your permanent life policy is an accelerated benefit if you become sick and need help with medical bills. You can take an advance on your death benefit, but if you do, you’ll limit (or can even completely eliminate) how much your beneficiary receives when you pass away. 

It’s also important to understand the structure of your policy’s cash value, each of which comes with its own set of advantages and disadvantages. A plan with a guaranteed rate means you don’t have to worry about losing value due to market performance. But it could stunt your savings’ long-term growth if the market performs well.

On the other hand, you could potentially grow your savings more if your cash value is invested. But there’s also a risk that your policy will lose value over time. This could hinder your ability to tap into the cash value plan if you ever need it.

Pros and cons of term life insurance

Term life insurance is temporary, and comes with a different set of pros and cons when compared to permanent life insurance. 

Pros

Term life insurance comes with less expensive premiums compared to permanent life insurance because your policy is only valid for a predetermined period of time. But it can be an affordable option when you have one or more dependents who financially rely on you.

Cons

There’s no cash value component of term life insurance and if you live to reach the end of your term, then you don’t receive any portion of the death benefit. When you explore new life insurance policies once your initial term ends, you’ll likely discover much higher premiums because you’re older. 

Like any other type of life insurance, you’ll lose your coverage completely if you don’t keep up with your premium payments. This makes it crucial to keep up with your payments, otherwise you’ll lose the peace of mind you receive from having an affordable term life policy. 

The takeaway: 

  • Life insurance can financially provide for heirs in a number of ways
  • Individuals of any age may benefit from a life insurance policy
  • Choose between term and permanent depending on your circumstances

Why buy life insurance? No matter how much financial planning you’ve done in your life, an additional policy gives your beneficiaries an essential financial cushion in the event of your death. Evaluate who relies on you for some or all of their livelihood to determine the best type of policy for your specific situation.

Lauren Ward

Lauren Ward is a writer for Coverage.com. She specializes in all things personal finance, including insurance, loans, and real estate.

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