Life insurance pays your loved ones if you die, but do you really need it? Some people see life insurance as a necessity. It helps them reach their financial goals and protect their families. Others see it as a luxury that’s nice to have but not a priority.
So which is it? That depends on your situation. To help you figure out if you need life insurance, you first need to understand the pros and cons of buying life insurance. Of course, the benefits and costs of life insurance vary depending on which type of policy you buy.
Here’s what we’ll cover:
People who buy life insurance enjoy one or more of the following benefits:
- Peace of mind
- An expanded financial portfolio
- Tax benefits
- Flexible financial security
- Affordable coverage
Peace of mind
The number one reason people buy life insurance is that if they died, someone they cared about would be in a rough spot financially. Life insurance protects your loved ones from financial hardship caused by losing you.
If you’re married, you might worry about how your spouse will pay off the house or put food on the table without your income. If you’re a parent, you might worry about your kids paying for college without you, or how their guardian will pay for childcare. Or maybe you want to spare your loved ones from digging into their own pockets to pay for your funeral.
Plenty of people lose sleep over these thoughts, but the right life insurance policy can help you feel confident your loved ones will have everything they need if you pass away unexpectedly. But having a policy can also help you live more fully today.
Let’s say you want to invest in yourself or improve your lifestyle right now, but draining your savings to put a down payment on a house or go back to school makes you nervous. What if you take on all that debt and then die unexpectedly? Would anyone you love get stuck with the bill? If you have life insurance, you know your debts will be paid even if the worst happens. You can feel more confident in taking these financial risks to improve your life now.
Expanding your financial portfolio
Not all life insurance policies increase your net worth, but those that come with a cash value component can. Cash value acts like a savings or investment account, accumulating funds as you pay your premiums and collecting interest along the way. Many people use their life insurance policies as a way to diversify their retirement savings or “force” themselves to put aside cash for a rainy day. While cash value shouldn’t replace an emergency fund, you can take out a loan against it if you need to. You’ll just need to pay it back, or the death benefit your loved ones receive will be reduced by the amount you owe.
Two main tax benefits may come with life insurance: a tax-free death benefit and tax-free cash value growth.
Tax-free death benefit payout
If your net worth is already high, you might buy life insurance solely to avoid estate taxes when leaving an inheritance to your spouse or children. Death benefit payouts are tax-free in most cases, so if you set your policy up smartly, you could prevent Uncle Sam from taking a massive cut of your estate.
For most people, the tax benefits of life insurance are more of a perk. Generally, your beneficiaries won’t have to pay taxes on the money your policy pays them.
Tax-free cash value growth
If you buy a cash value policy, any interest your account earns grows without you having to claim it on your taxes. People who want to access their cash value can borrow it from this account tax-free in most cases as well.
Flexible financial security
No one knows what life will send your way, and life insurance is like a Swiss Army knife of financial protection. Your beneficiaries can wield the death benefit payout to cover whatever expenses they wish, even if you buy final expense life insurance specifically. Loved ones can use the money to pay down the mortgage, send the kids to college, or keep food on the table.
Some life insurance policies offer flexibility for you too. For instance, universal life insurance allows you to adjust your premiums and death benefit payout as needed. And if you buy a term life policy with a conversion option, you could extend your life insurance to provide lifetime coverage.
There are even optional riders that allow you to take out part of your death benefit while you’re still alive if you’ve come down with a terminal illness—and when it comes to expensive chemo treatments, that flexible option can make all the difference.
Most people overestimate the cost of life insurance, believing it costs three times what they’d actually pay. In particular, millennials overestimate by more than five times the actual price.1
The truth is, life insurance can be quite affordable, depending on your situation and the policy you choose. Term life is cheaper than whole, for example, and young, healthy people see lower rates than older adults with preexisting conditions.
If you’re looking for life insurance for seniors or you have preexisting conditions, you may still have inexpensive options. Insurers tend to specialize in insuring people in specific situations to make a name for themselves among those shoppers. Some companies are quite forgiving of former tobacco use, for example. Others may offer low rates for people with diabetes.
If you get a life insurance quote you that you think is too high, shop around. Chances are, you’ll find a lower rate for similar coverage elsewhere.
Apply Online Life Insurance
Life insurance is notorious for being a bit behind the times when it comes to online applications. Luckily, there are a few companies that do offer an online application that is quick and easy to fill out so you can get protection fast.
|Apply Online Life Insurance|
|Fabric||Fabric is an online company that offers term life insurance. In addition to life insurance, they offer other family planning tools like wills and a vault for your must-have financial info.||Get a Quote|
|Haven Life||Haven life offers term life insurance. Their application is easy and they provide an instant decision on coverage eligibility and your rate.||Get a Quote|
|Bestow||Bestow offers 2-, 10-, and 20-year term life insurance plans. There’s no medical exam and algorithmic underwriting allows for a quick result.*||Get a Quote|
*Issuance of policy may depend on answers to a medical questionnaire.
While there are many reasons to invest in life insurance, owning a policy isn’t all positives. Buying life insurance comes with the following caveats:
- You’ll pay premiums
- You may have better investment options elsewhere
- You’ll have to plan ahead
- You’ll have to do some research
The cost of life insurance
While life insurance is cheaper than most people think it is, you’ll probably still have to open your wallet for your policy. True, many employers sponsor small amounts of coverage at little or no cost to employees, but this coverage rarely meets all of the policy owner’s needs.
We’re going to level with you: you may have to adjust your budget to buy life insurance. For a young, healthy person with low coverage needs, it will likely be a small adjustment. Unfortunately, people who need life insurance most may see the highest rates.
People older than 50, those with preexisting conditions, and shoppers looking for a substantial death benefit may need to tighten their belts quite a bit to afford a policy. It’s super important for these people to shop around.
You may have better investment options elsewhere
Hang around the blogosphere researching life insurance for a few minutes, and you’re sure to run across the most heated argument in life insurance: Term vs. whole: which is better?
Whole-lifers tout the benefits of permanent coverage and the tax-free investment that comes with cash value. Term-lifers say cash value is a weak investment and makes coverage cost too much.
Who’s right? They both are. While cash value grows tax-free, it usually grows pretty slowly. Even though the rate varies by company and policy, most people see higher returns from their 401(k)s, mutual funds, and the stock market.
If you’re considering cash value life insurance for its investment benefits, make sure you’re already maxing out your 401(k) and IRA. Also, read your policy carefully. Some types of cash value life insurance—like those that invest in the stock market—are riskier than others
Life insurance requires planning ahead
Life insurance moves at the speed of a lifetime. For starters, the application process can take several weeks, and you may have to take a life insurance exam. But even if you choose a no exam policy, you may need to think ahead—into the next decade or beyond.
Most policies last anywhere from 10 years to your entire life—ideally many decades from now. You can choose a policy with lots of flexibility baked in, so you’re covered no matter what life throws at you. Or you can build your own ladder strategy for life insurance.
It’s also essential to buy with an insurer that can stand the test of time. Luckily, there are a few easy ways to vet life insurance providers for financial stability. Several rating entities grade companies on their financial strength. Those are:
We reflect these ratings in every review we write, but you can also go to each entity’s website and look up specific companies there.
Another great sign that an insurer has the chops to drive long-term success? Longevity. Many of today’s top companies were founded in the 1800s, but simply choosing one that started before vinyl records were cool—the first time around—is a good idea.
Life insurance requires research
As you may have guessed from the above section, finding the right insurer and policy can take some research. Buying the right policy could mean understanding how life insurance works, the various policy types, and the differences between each insurer’s specific products.
Unfortunately, all this info isn’t always easy to find. Many insurers are tight-lipped about their policies unless you speak directly with an agent, and you may even find conflicting info on different websites.
Lucky for you, distilling what you need to know to buy the right policy is what we do. Case in point? Here are the advantages and disadvantages of the three most common types of life insurance.
Now that we’ve covered the more general advantages and disadvantages of life insurance, let’s talk about how the policy you choose can shake things up.
Term life insurance
The benefits of term life insurance include:
- Low, fixed payments: Term life is typically the cheapest kind of life insurance and your payments remain consistent for the entire term.
- Simplicity: Term life is straightforward. You don’t have to understand cash value, surrender fees, and the other mechanics of whole or universal life.
- Convertibility: Most insurers offer options for converting your policy to whole or universal life if you want to later—at your new age and health, of course.
The drawbacks of term life insurance include:
- It ends: Once your term is up (usually after 10 to 30 years), your coverage ends.
- No cash value: If you’re looking for life insurance and investment options in one product, you’ll be disappointed. Unlike The Dude, term life doesn’t abide.
Learn more about term life insurance.
Whole life insurance
The benefits of whole life insurance include:
- Fixed payments: Coverage on day one costs the same as day 100, day 1,000, and day 26,702.
- Lifelong insurance: You don’t have to worry about your term ending. You’re covered for life.
- Guaranteed payout: Coverage lasts until age 100, but if you live longer, you’ll receive a payout when your policy matures instead of your beneficiaries.
The drawbacks of whole life insurance include:
- High cost: Whole life is typically the most expensive type of life insurance.
- Complexity: Understanding how your cash value grows and what it might cost to surrender (give up and cash out) your policy isn’t always easy.
- Weak investment: Slow and steady is whole life’s motto when it comes to cash value growth.
Learn more about whole life insurance and how it works.
Universal life insurance
The benefits of universal life insurance include:
- Multiple options: Indexed universal, variable universal, guaranteed universal, and regular ol’ universal each provide a different way to handle your cash value.
- Flexibility: You can adjust your premiums and death benefit on the fly as your needs change.
- Lifelong coverage: Provided you keep paying a minimum premium, you’re covered for life.
The drawbacks of universal life insurance include:
- Medium to high cost: Universal life usually costs more than term but less than whole life.
- Complicated: In addition to cash value and surrender fees, add financial indexes and the stock market to your research list.
- Possible risk: Unless you buy guaranteed universal life, the insurer can raise your minimum premium to cover rising policy maintenance costs.
Learn more about universal life insurance and how it works.
Bottom line: Do you need life insurance?
Life insurance has many advantages, but there can be disadvantages if you choose the wrong policy, don’t do your homework, or skip shopping around. We wish buying life insurance was as easy as tossing a policy into your Amazon cart, hitting the “buy now” button, and getting free two-day shipping. Unfortunately, it’s more complicated than that.
But don’t worry. We’re here to help you navigate this world—without judgment, bias, or overly zealous sales agents. So until Prime Day arrives for life insurance (and even then), consider us your partner in life insurance.
If you’re ready to get started, use our life insurance calculator. It’ll help you figure out how much coverage you need—and whether you need it at all.
If not ready to start crunching numbers, learn how to buy life insurance.
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