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Life insurance can be a valuable tool to protect loved ones from financial hardship in the event of death. But paying for something you may not be 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 you take out a life insurance policy, a contract is formed between you and the life insurance company. You regularly pay premiums in exchange for a lump-sum death benefit that is paid to your beneficiary (s) at the time of your death.
This death benefit can be used for any purpose. Often, the funds help cover important expenses that your loved ones may have a hard time paying for in your absence, such as funeral expenses, mortgage payments, tuition, and other bills.
Related: How does life insurance work?
There are two main types of life insurance, each with advantageous features in certain situations. When deciding whether life insurance is worth taking out, you will first need to consider which type of insurance makes the most sense for you.
Term life insurance
The first is term life insurance. As the name suggests, it’s meant to cover you for a tier duration period, during which time your reward and death allowance won’t change. The 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 will receive a death benefit. At the end of the period, you may be able to renew your policy every year, but you will pay higher rates with each renewal. If you don’t renew, your coverage expires and there is no payment.
Term life insurance can be a good option if losing an income would make your family financially vulnerable. In this case, term life insurance acts as a safety net.
For example, let’s say you are 30, married, and have young children. Maybe you also have a mortgage. You could purchase term life insurance to make sure your spouse is not financially burdened if you die prematurely. Once your children are older and your debts have been paid, it may not be so 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 don’t expire, as long as you keep up with premium payments. Permanent life insurance policies typically also accumulate cash value on a tax deferred basis. Cash can be withdrawn or borrowed. (Taking a withdrawal or having a loan balance will mean a lower death benefit for the death beneficiaries.)
There are several types of permanent life insurance, including whole life insurance and universal life insurance.
The exact rules surrounding permanent life insurance and its cash value component depend on the type of policy and the individual insurer. However, permanent life insurance is more expensive than term life.
How much does life insurance cost?
Here are some examples of life insurance quotes based on a 30 year old male of average height and weight for $ 500,000 of coverage. As you can see, an entire life insurance policy would cost $ 4,323 per year, while a 30-year life insurance policy would only cost $ 357 per year.
Life Insurance Examples
The average cost of life insurance will vary greatly 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 policy for $ 500,000 of coverage is 19% more expensive for a 30-year-old man than for a 30-year-old woman.
How old are you when you buy a policy can also drastically affect your premium. Buying a term life policy at the age of 40 instead of 30 can increase life insurance prices by 36%. Waiting up to 50 years to purchase can increase the cost by up to 212%.
Pros and cons of life insurance
To decide whether buying life insurance is a good idea, help weigh the pros and cons. In many cases, the benefits of having life insurance far outweigh the drawbacks. But life insurance may not be suitable for everyone. Here’s what to consider.
Pros of life insurance
- Financial protection for loved ones. This is the main reason for buying life insurance. It provides peace of mind that your family won’t be left in financial trouble if you die.
- Variety of options. When it comes to choosing a life insurance policy, you have a lot of choices. It is usually possible to find a policy that suits your family’s needs and budget.
- 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 leverage these funds while you are alive.
- Tax benefits. Any growth in cash value is tax deferred. In addition, the beneficiaries do not have to pay taxes on the death benefit. (An exception is if the death benefit goes to taxable property, which can be avoided with proper planning.)
Cons of life insurance
- Cost to be absorbed. While you can greatly benefit from life insurance, it is an additional cost that you need to budget for. A young family may find it difficult to budget for any regular additional spending.
- The purchase cost increases with age. The longer you wait to purchase a policy, the higher the premiums are likely to be. If you are a little older and are only now considering life insurance, be prepared to pay more than if you took 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 prices because your life expectancy is shorter.
Is Life Insurance Worth It?
If you are single, have a lot of money to survive your family, or there is no one financially dependent on you, you probably don’t need life insurance.
On the other hand, if you have loved ones who are financially dependent on you, or have debts that would be burdensome for your family if you died, it is probably worth it. It is valuable financial protection and is often part of a solid overall financial plan.
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