Is life insurance worth it? – Forbes Advisor

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Life insurance can be a valuable tool to protect loved ones from financial hardship 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 you take out a life insurance policy, a contract is made 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. Often, the funds help cover large expenses that your loved ones may struggle to afford in your absence, such as funeral expenses, mortgage payments, tuition fees and other bills.

Connected: How does life insurance work?

There are two main types of life insurance, each with features that are useful in certain situations. When deciding whether life insurance is worth it, you should first consider what type of insurance is best for you.

Term life insurance

The first is term life insurance. As the name suggests, it aims to cover you for a level 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 the death benefit. When the term ends, you may be able to renew the policy every year after that, but you’ll pay higher rates each time you renew. If you do not renew, coverage ends and there is no payout.

Term life insurance can be a good option if the loss of income would make your family financially vulnerable. In this case, term life insurance acts as a safety net.

For example, say you are 30 years old, married and have young children. Maybe you have a mortgage too. You can buy term life insurance to make sure your spouse is not burdened financially if you die prematurely. Once your children are grown and your debts are paid off, it may not be as important for you to have life insurance coverage 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 usually don’t 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 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 die.)

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 insurance.

How much does life insurance cost?

Here are examples of life insurance quotes based on a 30-year-old man 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.

Life Insurance Cost Examples

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 a 30-year-old woman.

How old you are when you buy a policy can also dramatically affect your premium. Buying a term life insurance policy at age 40 instead of age 30 can increase your life insurance quotes by 36%. Waiting until age 50 to buy can increase costs by up to 212%.

Pros and cons of life insurance

To decide whether buying life insurance is a good idea, it will help you weigh the pros and cons. In many cases, the benefits of life insurance far outweigh the disadvantages. But life insurance may not be right for everyone. Here’s what you should keep in mind.

Advantages 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 be left financially stranded if you die.
  • Variety of options. When it comes to choosing a life insurance policy, you have many choices. Finding a policy that fits your family’s needs and budget is usually possible.
  • Monetary value. If you buy a permanent life insurance policy, it will usually have a cash value component that can grow over time. You can choose to avail these funds while you are alive.
  • Tax benefits. Any increase 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 goes into a taxable estate, which can be avoided with proper planning.)

Cons of life insurance

  • Undertaking costs. Even if you can benefit greatly from life insurance, it is an additional expense that you need to budget for. A young family may have difficulty budgeting for additional regular expenses.
  • Purchase costs increase with age. The longer you wait to purchase a policy, the higher the premiums will be. If you’re a little older and just 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 generally increase life insurance quotes because your life expectancy is shorter.

Is life insurance worth it?

If you are single, have enough money to keep your family alive, or have no one 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 be burdensome to your family if you die – life insurance is probably worth it. This is valuable financial protection and is often part of a sound overall financial plan.

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