Is Life Insurance Worth It?
Life insurance tends to go on that list of things we feel like we should do, but maybe we get around to actually doing it and maybe we don’t. Currently about 57% of adults in the United States have life insurance policies. For everyone else, it always feels like something we can worry about later.
The view of getting life insurance as one of those responsible moves adults are supposed make obscures the larger question: is it actually worth it?
The answer is that always tricky one: it depends.
Term Life Insurance vs Whole Life Insurance
Before moving further into the discussion of whether life insurance is a smart financial move, we need to define the main two types of insurance available:
Term Life Insurance
This type of life insurance most accurately matches the idea of what we view as insurance. The idea is that you agree to pay into a plan that lasts for a limited about of time – say 20 years – and you have coverage throughout that time (for as long as you keep paying), but the plan ends at the end of the term. That means if you die during the set term, your family gets the coverage. If you live the full twenty years and beyond, coverage ends unless you extend the plan or purchase a new one.
Whole Life Insurance
This is a plan meant to pay out regardless of when you die. As long as you keep up with your premiums, there’s no point where coverage stops. The cost of whole life insurance plans tend to be much higher than term ones and insurance brokers often tout them as investments – more of a hybrid insurance/retirement planning option than just life insurance.
Reasons to Buy Life Insurance
One of the most common reasons to buy life insurance is because you have dependents and don’t have enough in assets and savings for them to live comfortably if you pass. For those with debt, such as a family in the early years of a mortgage, the decision to purchase life insurance can mean your kids and spouse won’t lose the house if you die before it’s paid off.
Another good reason to consider it is if you own a business. Your death could be expected to cause difficulties in keeping the business running, and having some extra money to help tide it over could make a big difference to avoid going out of business and employees losing their jobs.
Of course, none of these reasons make too much sense if you can’t afford the monthly premiums, but many people find term insurance affordable (if not whole life insurance).
One benefit for considering life insurance is that the amount awarded to your family will be tax free, unlike many other assets passed on in an inheritance, as long as you paid the premiums out of your own pocket (rather than it being covered by an employer).
And there are some plans that allow you to take money out of the lump sum while you’re still alive if you need it. This mostly occurs with whole life insurance plans that have riders, which come with higher premiums, but offer much more flexibility in when and how you can use the money.
Reasons to Skip Life Insurance
Comparatively speaking, it’s not a great investment. If you want your money to go further over time, there are many better investment options that will have a higher return. Whole life insurance plans tend to be very costly for what you’ll ultimately get out of them. In most cases, you’d be better off putting that money into your savings or retirement account.
If you’re single and don’t have dependents, a life insurance policy doesn’t make much financial sense. Hang onto that money or put it into long-term care insurance when you reach your mid-50’s so it will be there when you need it as you age.
Life insurance is worth it for you if the peace of mind of knowing your spouse and kids will be financially taken care of if you die suddenly outweighs the costs of the premiums. No economist can place a clear dollar amount to peace of mind, so you’ll have to decide for yourself what it’s worth to you.