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Life insurance can be a valuable tool to protect loved ones from financial problems if you die. But paying for something you might not end up using can seem like a waste of money. Even if your policy ends up paying a death benefit, the premiums can be expensive.
So is life insurance worth it? Here’s how to decide if it’s right for you.
How does life insurance work?
When taking out a life insurance policy, a contract is created between you and the life insurance company. You pay regular premiums in exchange for a lump sum death benefit that is paid to your beneficiary (or beneficiaries) when you die.
This death benefit can be used for any purpose. Funds often help cover large expenses that your loved ones can afford in your absence, such as funeral costs, mortgage payments, school fees and other bills.
Related: How does life insurance work?
There are two main types of life insurance, each with features that are advantageous in certain situations. When deciding whether life insurance is worth it for you, you’ll first want to consider what type of insurance makes the most sense for you.
Term life insurance
The first is term life insurance. As the name suggests, it is meant to cover you for a period during which your premiums and death benefits will not change. Terms are usually 5, 10, 15, 25 or 30 years.
You pay premiums while the policy is active, and if you die during that period, your beneficiary receives the death benefit. Once the term is over, you can then renew your policy each year, but you’ll pay higher rates each time you renew. If you do not renew, coverage ends and is not paid.
Term life insurance can be a good option if the loss of income would leave your family financially vulnerable. In this case, term life insurance works as a safety net.
For example, let’s say you are 30 years old, married and have young children. You may also have a mortgage. You can buy term life insurance to make sure your spouse isn’t financially burdened if you die early. When your children are older and the debts are paid off, it may not be so important for you to have life insurance for this purpose.
Term life insurance is usually less expensive than other types of life insurance.
Permanent life insurance
Permanent life insurance is exactly what it sounds like. These policies generally don’t expire – as long as you keep up with your premium payments. Term life insurance policies also typically accumulate cash value on a tax-deferred basis. Cash can be withdrawn or borrowed. (A withdrawal or loan balance will mean a lower death benefit for your beneficiaries if you die.)
There are several types of permanent life insurance, including whole life insurance and universal life insurance.
The exact rules regarding permanent life insurance and its cash value component depend on the type of policy and the specific insurer. However, permanent life insurance is more expensive than long-term.
How much does life insurance cost?
Here are examples of life insurance quotes based on a 30-year-old male of average height and weight for $500,000. As you can see, whole life insurance would cost $4,323 per year, while 30-year term life insurance would only cost $357 per year.
Examples of life insurance costs
The average cost of life insurance will vary dramatically depending on your health and age, gender, death benefit amount, policy type (ie term or permanent) and more.
For example, according to our research, a 20-year policy for $500,000 in coverage is 19% more expensive for a 30-year-old man than for a 30-year-old woman.
How old you are when you buy your policy can also greatly affect your premiums. If you buy a term life policy at age 40 instead of age 30, you can increase the cost of your life insurance by 36%. Waiting to buy until age 50 can increase costs by up to 212%.
Advantages and disadvantages of life insurance
Weighing the pros and cons helps you decide whether buying life insurance is a good idea. In many cases, the advantages of life insurance far outweigh the disadvantages. However, life insurance may not be suitable for everyone. Here’s what to consider.
Benefits of life insurance
- Financial protection for loved ones. This is the main reason to buy life insurance. It provides peace of mind that your family will not have financial problems if you die.
- Different options. When it comes to choosing life insurance, you have many options. It’s usually possible to find a policy that fits your family’s needs and budget.
- Cash value. If you buy permanent life insurance, it will generally have a cash value component that can grow over time. You can choose to use these funds while you are alive.
- Tax benefits. Any growth in cash value is tax-deferred. Plus, your beneficiaries don’t have to pay taxes on the death benefit. (The exception is if the death benefit ends up in a taxable estate, which can be avoided with proper planning.)
Disadvantages of life insurance
- Absorption costs. While you can benefit greatly from life insurance, it is an additional cost that you must consider. A young family may have trouble budgeting for any other regular expenses.
- Purchase costs increase with age. The longer you wait to buy a policy, the higher your premiums are likely to be. If you’re a bit older and you’re just now considering life insurance, be prepared to pay more than if you had taken out the policy years ago.
- A medical history can increase life insurance prices. Certain risk factors, such as obesity, high blood pressure, or smoking, will usually increase life insurance prices because your life expectancy is shorter.
Is life insurance worth it?
If you are single, have enough money for your family to survive, or no one is financially dependent on you, you probably don’t need life insurance.
On the other hand, if you have loved ones who depend on you financially – or you have debts that would burden your family in the event of your death – life insurance is probably worth it. It’s valuable financial protection and is often part of a solid overall financial plan.
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