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Life insurance can be a valuable tool for protecting loved ones from financial difficulties if you die. But paying for something you may not end up using can seem like a waste of money. Even if your policy does end up paying out 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 you take out a life insurance policy, a contract is formed between you and the life insurance company. You pay regular premiums in exchange for a lump-sum death benefit that’s paid to your beneficiary (or beneficiaries) when you die.
This death benefit can be used for any purpose. Often, the funds help cover major expenses that your loved ones might struggle to afford in your absence, such as funeral costs, mortgage payments, tuition and other bills.
Related: How Does Life Insurance Work?
There are two main types of life insurance, each with features that are beneficial in certain situations. When deciding if life insurance is worth it, you’ll want to first 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 level term period, during which your premium and death benefit 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 time, your beneficiary will receive a death benefit. When the term ends, you may be able to renew the policy every year after that, but you’ll pay higher rates at each renewal. If you don’t renew, coverage ends and there is no payout.
Term life insurance may be a good option if losing an income would leave your family financially vulnerable. In this case, term life insurance acts as a safety net.
For example, say you’re in your 30s, married and have young children. Maybe you have a mortgage as well. You might buy term life insurance to ensure your spouse isn’t financially burdened if you die prematurely. Once your children are older, and your debts are paid, it might not be as crucial for you to have life insurance coverage for that purpose.
Term life insurance is typically less expensive than other types of life insurance.
Permanent life insurance
Permanent life insurance is exactly what it sounds like. These policies generally do not expire—as long as you keep up with premium payments. Permanent life insurance policies also typically accumulate cash value on a tax-deferred basis. Cash value money can be withdrawn or borrowed against. (Taking a withdrawal or having a loan balance will mean a lower death benefit for your beneficiaries if you pass away.)
The exact rules surrounding permanent life insurance and its cash value component depend on the type of policy and individual insurer. However, permanent life insurance is more expensive than term life.
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 in coverage. As you can see, a whole life insurance policy would cost $4,323 per year, while a 30-year term life insurance policy would only cost $357 per year.
Cost of life insurance examples
The average cost of life insurance will vary dramatically depending on your health and age, gender, death benefit amount, type of policy (i.e., term or permanent) and more.
For example, according to our research, a 20-year term policy for $500,000 in coverage is 19% more expensive for a 30-year-old male than for a 30-year-old female.
How old you are when you purchase a policy can also drastically affect your premium. Buying a term life policy at age 40 instead of age 30 can increase your life insurance quotes by 36%. Waiting until age 50 to buy can increase the cost up to 212%.
Pros and Cons of Life Insurance
To decide whether buying life insurance is a good idea, it helps to weigh the pros and cons. In many cases, the benefits of having life insurance far outweigh the drawbacks. But life insurance may not be right for everyone. Here’s what to consider.
Pros 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 won’t be left struggling financially if you die.
- Variety of options. When it comes to choosing a life insurance policy, you have a ton of choices. Finding a policy that fits your family’s needs and budget is usually possible.
- Cash value. If you buy a permanent life insurance policy, it will generally have a cash value component that can grow over time. You can choose to take advantage of these funds while you’re alive.
- Tax benefits. Any cash value growth is tax-deferred. Plus, your beneficiaries don’t need to pay taxes on the death benefit. (An exception is if the death benefit goes into a taxable estate, which can be avoided with proper planning.)
Cons of life insurance
- Cost to absorb. Even if you can benefit greatly from life insurance, it is an additional cost that you need to budget for. A young family might have a hard time budgeting for any additional regular expense.
- Cost to buy increases with age. The longer you wait to buy a policy, the higher the premiums will likely be. If you’re a bit older and just now considering life insurance, prepare to pay more than if you had taken out a policy years ago.
- Medical history can increase life insurance quotes. Certain risk factors such as obesity, high blood pressure or smoking will typically increase life insurance quotes because your life expectancy is shorter.
Is Life Insurance Worth it?
If you’re single, you have plenty of money for your family to survive on, or there isn’t anyone financially dependent on you, you likely 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 be burdensome for your family if you died—life insurance is likely worth it. It’s valuable financial protection, and is often part of a solid overall financial plan.
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