A life insurance contract involves an insurance company and you, with the company paying a lump sum known as a death benefit in exchange for premium payments. Before incorporating life insurance into your financial plan, it’s crucial to weigh the potential for long-term premium payments. The purpose of a life insurance policy can determine its value as an investment.
Generally, term life insurance may be worth it even if you outlive the policy, as it ensures your loved ones have sufficient funds in case of your death. Most people prefer purchasing a term policy for tax-free investment benefits while living while allocating funds to other tax-free options. Despite finding better retirement investment methods, consider using permanent life insurance to provide retirement benefits.
Kinds of Life Insurance
To help you make an informed choice, it is beneficial to know what kinds of life insurance options are available and how they operate before you purchase a policy. There are two types of life insurance: permanent and term.
Term life insurance
Term life insurance has a predetermined expiration date, typically lasting 10-30 years, but some policies can last up to 40 years or less. Premiums remain level throughout the policy, but coverage cost increases with age at the time of policy purchase.
Life insurance companies consider factors like age when issuing policies, with term policies being less expensive due to their lack of cash value compared to permanent policies. The policy is less expensive as it only guarantees the policyholder’s death within the specified timeframe, and ends when the term ends.
Permanent life insurance
As long as premiums are paid, permanent life insurance covers a policyholder for the duration of their life. Permanent life insurance policies have a cash value component, applying premiums to a tax-deferred investment account, which can be borrowed or withdrawn from as needed. These factors usually result in permanent life insurance premiums being higher than those of term life insurance.
Whole life insurance policies have predetermined premiums and a cash value that increases at a predetermined rate. Universal life insurance provides financial flexibility by allowing policyholders to adjust premiums and death benefits based on their needs. It also offers higher earnings than whole-life policies due to its growing cash value.
When Life Insurance Worth It
Generally, life insurance pays for itself if your passing would leave others in a difficult financial situation. You can consider obtaining coverage if:
- You wish to pay for your funeral: Your loved ones might not have the money to pay for the costly nature of funerals. The cost of a funeral or cremation can be covered by life insurance.
- Your goal is to substitute your income: You might want life insurance to replace your income in the event of your death, especially if your spouse or child depends on it.
- Your goal is to pay off your debts: Debts are paid by spouses in states with community property, co-signers, or co-owners. However, it may be liable for the remaining amount. To assist the person you leave behind in paying off your debts, you can use a life insurance policy to cover them.
Obtaining life insurance for another person might also be worthwhile, particularly if their passing would affect your finances. To cover living expenses in the event of your spouse’s death, you can purchase a life insurance policy on them if you depend on their income.
When Life Insurance is Not Worth It
It might not be worth it to purchase life insurance if your passing wouldn’t put someone in financial hardship. You can consider ignoring the coverage if
Nobody is financially dependent on you
Investing in a life insurance policy may not be the best use of your time and money, particularly if the payout isn’t essential to another person’s survival.
You can’t afford it
Purchase life insurance only if the premiums fit into your long-term financial plan. Term life insurance policies can be very long, sometimes lasting 30 years, while permanent policies usually last your entire life. Your policy may lapse if you don’t make payments, in which case your beneficiaries would receive nothing. You might not want to get life insurance if you don’t think you can afford the premiums going forward.
Increasing your wealth is your main objective
Life insurance primarily aims to provide beneficiaries with a specific sum upon death, rather than increasing an investment portfolio, although some policies may include cash value components. Charges to offset the cost of providing you with insurance are included in all life insurance policies. Discuss the wealth-building options that are best for you and your financial circumstances with a fee-only financial advisor.
Is Life Insurance Worth the Cost
Life insurance prices are competitively priced, with insurers determining quotes using different processes, but some factors remain constant. The following factors usually affect the premium you pay:
- Age.
- Health and past medical records.
- Employment.
- Lifestyle.
- Gender.
- Type of policy.
- The extent of coverage.
A FICO or credit-based insurance score may also be taken into account by insurers in some states when setting premiums. Because every situation is different, term life insurance and permanent life insurance are priced differently by each provider. Consider collaborating with a financial advisor or an experienced independent life insurance agent to secure the most suitable policy for your specific needs.
Is Life Insurance Worth It
Life insurance is a personal decision, but there are common reasons why people choose to buy it, and it might be worth it. The cost of purchasing life insurance varies based on your financial status and the length of time you need coverage. Permanent life insurance lasts until death as long as premiums are paid, while term life insurance only lasts for a predetermined amount. Investing the premium difference in term life insurance can be a more financially beneficial option for individuals without substantial assets.