Is life insurance worth it?
Nothing beats the peace of mind that comes with knowing that your loved ones will have help after you’re gone. That’s why purchasing a life insurance policy is so important. It can feel overwhelming to know when and if you should purchase life insurance. If you’re asking yourself “is life insurance worth it,” we can confirm that in most cases it most certainly is.
There are many questions to ask yourself when considering life insurance. “What are my life insurance options? What are the life insurance costs? What is the difference between a term policy and whole life coverage?”
When you buy life insurance, you in some ways buy peace of mind. Let’s explore the types of life insurance, including term policies and permanent life insurance coverage, how life insurance works, and if now is the right time for you to purchase a life insurance policy.
What is life insurance?
Put simply, life insurance is income replacement. Life insurance plans help provide financial security to your family when you are gone. When you purchase a policy, you’re paying a premium to your provider who agrees to pay the amount (a.k.a. a death benefit) to your dependents if you were to pass away. A secure life insurance plan helps to provide your loved ones with long-term financial stability. It can be reassuring to know that coverages such as final expense insurance, or lost income coverage, can help provide financial support. Your loved ones are taken care of when you protect their financial situation with a life insurance policy.
There are two main types of life insurance: term life insurance and permanent life insurance policy. Term life insurance provides coverage for a specific period, usually 10, 20, or 30 years, and is generally more affordable. On the other hand, a permanent life insurance policy is more expensive due to its cash value component, provides lifetime coverage, and allows borrowing against accumulated cash value. Additionally, permanent policies offer tax-deferred growth and accelerated benefits, making them a valuable option for long-term financial planning.
How does life insurance work?
Life insurance is essentially a contract between you and an insurance company. You agree to pay regular premiums, and in return, the insurer promises to pay a lump-sum death benefit to your beneficiaries upon your passing. This death benefit can be used for various purposes, such as paying off debts, covering funeral expenses, or providing ongoing financial support for your loved ones.
There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years. If you pass away during this term, your beneficiaries receive the death benefit. However, if you outlive the term, the coverage ends, and no benefit is paid out.
On the other hand, permanent life insurance offers coverage for your entire lifetime, if you continue to pay the premiums. This type of policy not only provides a death benefit but also includes a cash value component that grows over time. This cash value can be borrowed against or withdrawn, providing additional financial flexibility.
Overview of term life insurance vs. whole
Term life insurance is a type of insurance policy that provides coverage for a specific amount of time; in most cases somewhere from one to 30 years. When you purchase a term life insurance policy, if you pass away during the covered period, the insurance company then pays a death benefit to whomever you have named as the beneficiaries of your policy. However, if you are still alive once the policy ends, your insurance company does not pay out anything at all, and your coverage stops.
A whole life insurance policy, the second type we’ll talk about in this post, is a bit more complicated than term life policies. It is also typically the more expensive life insurance. Whole life insurance is permanent life insurance that both pays out a death benefit and builds up a cash value over time. This means that a portion of each premium payment you make is channeled into a savings component of your policy, called its “cash value”.
In some situations, depending on your company and policy, you can choose to withdraw from these funds, or borrow against the amount. Whole life insurance is the most common type of life insurance, and, with this type of policy, you are covered for your entire life, as long as you’re consistent with paying premiums on time.
Younger is better
You may be fortunate enough to be at a point in your life where you’re young and healthy, but that doesn’t mean it’s not worth it to look ahead. For example, taking out a life insurance policy earlier in life can let you lock in better rates for the long term. Additionally, if you own property together with another adult, a life insurance policy can help them keep up rent or mortgage payments in the event of your passing.
Reasons you need life insurance (even at a young age)
Even if you are young and healthy, life insurance may be smart move. Here are some of the reasons you may need life insurance:
You’re going to have a baby
If your income disappeared, your minor children, who are unable to support themselves, would most likely be put at a severe disadvantage. The same is true if they will rely on you to help pay for their education or offer disability support.
You’re getting married
If you’re creating a life with your partner and they rely on your salary to pay for things like household spending, losing your income contributions could be disastrous for them.
You support your parents financially
If you are providing for an aging parent, life insurance can help your loved ones find new sources of assistance if you pass away.
You have private student loan debt
Your debts do not simply vanish when you pass away. People tasked with settling your estate’s debt who didn’t follow probate laws, co-signers on a loan, joint owners or account holders, spouses in community property states like California and Texas, and people tasked with settling your estate’s debt who didn’t follow probate laws could all be on the hook to pay your debts.
You work for yourself
If you work for yourself, you’ll need to consider the consequences of your death if you have a business partner or staff. To keep things running, you could take up a life insurance policy with your company partner as the beneficiary.
You have a high-risk job
You have a higher risk of mortality if you work in a dangerous or high-risk environment than if you sit at a desk all day. A larger premium is usually paid for in jobs like aviation, construction, firefighting, mining, oil and natural gas, and a few other fields.
You have extreme hobbies
If you’re a thrill seeker who loves extreme sports, a life insurance company will most likely consider you a higher-risk customer. However, it’s like having a high-risk job: you’ll pay more for insurance, but the expense is justified given your risk of dying from unnatural causes.
Who doesn’t need life insurance?
You can probably avoid buying a life insurance policy if no one in your life would be financially impacted by your death. For the time being, you may find that saving and investing in other assets — such as stocks, bonds, retirement funds, or real estate — is a better option.
Keep in mind that your life insurance coverage will be more reasonable if you are younger and healthier. If you anticipate significant life changes, it may be worthwhile to consider your options to lock in competitive pricing.
Should young people buy term or whole life insurance?
Term life insurance is, in general, the cheaper and more flexible alternative, and thus the preferable choice for many people. You can customize term life insurance to cover the years of your life when your death would have the greatest impact on your loved ones, and then review the policy when they can sustain themselves without your life insurance.
How much life insurance should I get?
Of course, your own financial security should be factored in when buying life insurance. While life insurance is a worthwhile investment, it’s important to remember that you will likely have monthly payments on your policy. The amount of life insurance you purchase will have a direct impact on the amount of your premium payments.
When considering purchasing a term life insurance policy or whole life insurance, consider who is financially dependent on you, and what is your medical history, your life expectancy. In the matter of an untimely death, what will happen with your outstanding debts? Which policy can accumulate cash? How much of a death benefit amount would provide the financial protection you and your family need.
Online insurance calculators, like this one from NerdWallet, are a wonderful place to start when shopping for coverage. They’ll ask you questions about your lifestyle and requirements to help you figure out how much coverage you need.
You can also calculate how much life insurance you need manually with a few simple steps:
- Multiply your annual income by the number of years you want the insurance to cover.
- Add any fixed expenses (like college tuition).
- Finally, subtract any non-retirement savings or investments you have that could cover some of these costs in lieu of an insurance benefit.
Should I use group life insurance through my job?
As a benefit, many employers provide free life insurance. Basic group life insurance policies are sometimes referred to as employer-provided life insurance policies. Coverage is almost always guaranteed, which means you won’t have to undergo a medical exam or answer any health-related questions to be eligible.
There’s no reason not to accept a basic life insurance policy because it’s free and often provides guaranteed coverage. All you do is sign up, and enrollment may be automatic in some cases.
What is supplemental life insurance?
Supplemental life insurance is a type of insurance that offers an extra layer of protection to an existing policy. Supplemental insurance is coverage that you buy in addition to your primary policy. Supplemental life insurance, often known as employee-paid or voluntary life insurance, is typically purchased from your company. It can help assist with financial matters and can be used as an additional death benefit. Private insurers can also provide coverage.
Whether you currently have some coverage but are seeking supplemental policy, or you have no coverage and want to be insured privately, Elephant Insurance can help. We partner with Fidelity Life and eFinancial to make getting a life insurance plan easy and accessible. Contact us or get a quote today.
Determining life insurance worth
Determining whether life insurance is worth it depends on your individual circumstances. If you have dependents, such as a spouse, children, or aging parents who rely on your income, life insurance can provide crucial financial security and protection for them in the event of your death. It ensures that your loved ones can maintain their standard of living, pay off debts, and cover essential expenses.
Even if you don’t have dependents, life insurance can still be a valuable consideration. It can cover your funeral expenses and any outstanding debts, preventing your family from bearing these financial burdens. Additionally, life insurance offers peace of mind, knowing that your loved ones will be financially protected and secure.
Life insurance policy costs
The cost of a life insurance policy varies based on several factors, including your age, health, lifestyle, and the type of coverage you choose. Generally, term life insurance is less expensive than permanent life insurance. However, the cost of premiums for term life insurance increases as you age.
Whole life insurance policies, which provide lifetime coverage and include a cash value component, are typically more expensive than term life insurance policies. The premiums for these policies are higher because they offer both a death benefit and a savings element that grows over time.
Other factors that influence the cost of premiums include the death benefit amount and the length of the term. Your medical history and lifestyle choices, such as smoking or engaging in high-risk activities, can also impact the cost of your life insurance policy.
Benefits and drawbacks of life insurance
Life insurance offers several benefits, including financial security and protection for your loved ones, peace of mind, and the tax-deferred growth of the cash value component in permanent policies. It ensures that your family can cover essential expenses, pay off debts, and maintain their standard of living in your absence.
However, life insurance also has some drawbacks. The cost of premiums can be expensive, especially for older individuals or those with health issues. Additionally, not everyone qualifies for life insurance, particularly if they have pre-existing medical conditions or do not meet the insurer’s health or height and weight guidelines.
Alternatives to life insurance
If you’re unsure whether life insurance is right for you, there are alternative options to consider. Creating a will or trust can ensure that your assets are distributed according to your wishes, providing financial security for your loved ones. Donating to charity or investing in a retirement account can also offer financial protection and support for your family.
Additionally, other types of insurance, such as disability insurance or long-term care insurance, can provide financial protection in case of unexpected events. These alternatives can complement or, in some cases, replace the need for a life insurance policy, depending on your individual circumstances and financial goals.
Through a simple process, Elephant can help assure your loved ones are taken care of should the unexpected happen. Contact us today to learn more.
Article last updated on December 5th, 2024 at 4:57 pm