If you’re anything like me, you’ve amassed a list of questionable ideas and things that just weren’t worth it. Near the top of the list has to be the time I snuck away to see my high school girlfriend when I was already grounded.
I drove my father’s car and parked on the street in front of my girlfriend’s house. Shortly after I arrived, a speeding, dent-riddled Dodge Van hit my father’s parked car.
The collision knocked my dad’s trusty Toyota into the front lawn where it came to rest, nestled amongst the petunias.
Luckily everyone escaped any serious injury, but the accident made the local paper. My father brings out the saved news clipping during family holidays.
For many of us, the decision to buy life insurance can seem like a similar moment, one that might end in a screeching bang of regret. Will buying a life policy be the right decision for you and your family? Is life insurance even worth it? Am I just throwing money away on a policy that will never payout?
The answer to whether life insurance is worth it might be different for each of us.
And a big part of the decision depends on your financial position. Some might feel life insurance is too expensive.
But those same people may be the ones who need life insurance the most.
Let’s look at the most common types of life insurance. We’ll also learn how to choose the right kind of policy. Some policy types might be a less-than-perfect fit. Lastly, we’ll explore whether buying life insurance is the right decision for you at all.
Spoiler alert: sometimes, it isn’t.
Reasons To Consider Buying Life Insurance
When I started my first business, I had no safety net. We had little in savings.
Okay, closer to nothing. If I wanted to rub 2 nickels together, I’d have to borrow one of them and then give it back later. And by leaving the company I was with for 16 years prior, I also gave up my benefits.
While COBRA offered a temporary solution for health insurance, I had no answer for life insurance coverage. Until that point, I had a small policy through a group life insurance plan.
But when you leave a job, your life insurance provided through your employer doesn’t come with you. It’s gone.
It’s fair to say I didn’t have a solid plan. I had a reasonable business plan, and it even worked. But I had no personal financial plan. That was a (big) mistake.
Some families might buy a life insurance policy to build wealth. Yes, certain policy types can do that.
Others might have an eye on life insurance’s ability to pass wealth to heirs in a tax-advantaged way. Life insurance can do that as well.
But those reasons to buy life insurance only represent a small percentage of policies.
For most households who buy life insurance, a life policy offers replacement income. Life insurance is a financial lifeline, one we hope our loved ones will never need.
Several common reasons to buy a policy include:
- Replacement income
- Burial and funeral expenses
- Pay off mortgage or other debt
- Pay for education for kids
- Business planning
- Build cash value
- Tax advantages for heirs
Reasons to buy coverage can vary, and many times your life insurance policy can serve more than one goal. However, some policy types may better address specific goals.
For example, a whole life policy can build cash value, whereas a more straightforward term policy does not.
When I left my job to start my own business, I should have bought a term life policy. I had a mortgage and people who depended on my income. What I didn’t have was someone telling me I should buy a policy.
I’m older now, and I’ve since purchased a term policy.
For my needs, the policy is a perfect fit and protects my family if the unexpected happens. My term policy covers the mortgage and debt but also provides replacement income for my loved ones.
Because it’s a term policy and not designed to last forever, the premiums are lower than other policy types.
Life Insurance Protects Against Life’s Risks
Everything we know can change in an instant. Life insurance can provide income for loved ones if the unexpected happens and we die early.
A life policy can also retire debt so that your family has fewer obstacles. Without a policy, the financial reality is that many families may have to drain their savings.
Some might even lose their home if they can’t afford to stay.
It’s easy to pretend nothing can go wrong. But it’s not accurate. As we get older, the risks to our health increase. But death statistics span every age group.
Heart disease and cancer remain leading causes of death in recent years. However, accidents rank third, underscoring the fact that we’re all at risk.
A close friend of mine passed not too long ago. He had some underlying health issues, particularly diabetes. You wouldn’t know it by looking at him, though. He was in his early 60s and led an active life. Teaching karate 6 days a week keeps you reasonably fit.
One day, he collapsed on the karate mats after class. Paramedics took him away in an ambulance. It was the beginning of a long struggle and one that can happen to any of us.
If the recent pandemic has taught us anything, it’s that illness can affect anyone, even the seemingly healthy. And in some cases, an illness can also uncover other hidden vulnerabilities.
One medical issue might exacerbate others, becoming the first of many dominos to fall.
It’s no fun to think about, but we’re not immortal. That said, risk shouldn’t rule our lives. Life is for living.
Life insurance provides a way to plan for the unexpected, though—and can prove invaluable if others depend on you financially.
Common Types Of Life Insurance (And What They Do)
Life insurance comes in several types. But 2 types are more common and fit the needs of most people. Term life insurance and whole life make up the vast majority of all life insurance policies.
For some situations, specialty policies such as a universal life policy or a variable life policy can offer flexible premiums while also (possibly) growing the value of the policy faster.
I chose a term life policy over a decade ago. After getting my insurance license and working with customers, I don’t question that decision.
Knowing what I know now, a term policy was still the right choice for my family. But it’s wise to understand the basic types of policies so you can choose the best fit for your family.
A term life policy guarantees a level premium for a fixed amount of time, called a term. A premium refers to the amount you pay for your policy.
A policy term can be short or long, depending on your needs and your age. Older applicants might not qualify for longer term lengths.
Here are some terms lengths offered:
- 5 years: A 5-year term policy can make sense if you’re starting a new business or taking out a 5-year loan.
- 10 years: If your kids have 10 years of school left and you have about 10 years left on the mortgage, a 10-year policy offers an affordable coverage option.
- 15-years: I have a 15-year term policy now. We bought our current home with a 15-year mortgage and matched the policy term to the length of time remaining on the mortgage. If I die during the coverage term, the policy can pay off the house and provide for my family.
- 20 years: A 20-year term policy is the most common choice for people buying a policy.
- 30 years: A 30-year policy might make the most sense if you just bought a home with a 30-year mortgage.
- 40 years: Most insurers don’t offer this option, but a 40-year policy can be an option for younger applicants.
A term life policy pays a death benefit to your beneficiary if you die while the policy is in force.
As you get older, though, you’ll find extended term lengths aren’t available. As we get older, we also have more risk of dying. Higher risk can be more expensive to insure. In some cases, coverage may not be available at all.
For example, a 50-year-old won’t find a 40-year term policy. At the end of the 40-year term, the insured would be 90 years old, well past the average life expectancy of about 79 years. The risk is too high to insure.
Even if the person is healthy, it may just be too late for a policy with this length.
Policies with a longer term cost more than a 5-year or 10-year policy, as do older applicants’ policies. You’ll save money on premiums by buying sooner rather than later.
Once the term has expired, most policies give you the option to continue coverage.
This option can help develop a health condition that might make it challenging to get another policy. But once the guaranteed premiums expire at the end of the term, a term policy can become much less affordable.
Term life is the most affordable life insurance option, but whole life offers protection for your entire life—or until the policy matures.
When the policy matures, usually at age 100, the policy pays the death benefit to you. If you die before the policy matures, the policy’s death benefit goes to your chosen beneficiary.
By design, a term life policy provides coverage for a limited time. Because of this structure, most term policies never pay a claim. But, by contrast, a whole life policy always pays someone for a covered claim.
The policy either pays your beneficiary or pays you when it matures.
As another feature, a whole life policy also builds cash value over time. This feature gives you the freedom to borrow against the policy or even use its cash value to pay the policy’s premiums.
Part of your premium helps build cash value (and earns interest), while part pays for your insurance coverage. Many whole life policies also earn dividends.
The extra freedom provided by a whole life policy’s cash value can also be its downfall, though. Many whole life policies self-destruct due to unpaid loans or premiums paid out from the policy’s cash value.
The road to zero value can take many years to travel, but the risk is more common than policyholders may realize.
Expect to pay more for a whole life policy. According to Policygenius, a whole life policy can be 5 to 15 times higher when compared to the premiums for a term life policy.
So, while a monthly payment for term policy may only be around $40 a month for 30 years, a whole life insurance policy could cost you around $400 or more a month.
Policygenius provides a leading online marketplace where you can compare policy prices and features from top insurers. Customize your coverage options to match your family’s needs and get instant quotes online. Compare life insurance rates with Policygenius.
Universal And Variable Life Insurance
Most families buy life insurance as a way to manage risk. But for some households, life insurance can offer a way to build cash value faster by adding an investment element or interest-bearing feature.
Universal and variable life insurance stray from traditional life insurance structures by giving you more control over how your policy’s value grows.
Along with a cash or investment account, universal and variable life insurance use an annually-renewable term life policy to provide life insurance coverage.
Because the policy renews annually, universal and variable life insurance are considered permanent life insurance, like whole life insurance.
When you’re young, this term coverage is affordable because you’re unlikely to die, statistically speaking. In later years, the cost of insurance can be much higher, though.
In theory, investment or interest growth for your variable or universal life policy offsets the increasing cost of life insurance coverage as you get older.
However, investments don’t always go up. Most investors know you can find extended periods during which markets went down or stayed flat overall.
With certain policy types, investment performance might affect your policy’s growth. You may even have to put in extra cash to fund the policy and keep it active.
Maybe you can afford the additional payments at that time—or perhaps you can’t. And maybe you’d rather spend the money on something else rather than fixing an underfunded life insurance policy.
Fees and other policy expenses can also slow growth in cash value or even cause negative growth.
Universal and variable life insurance policies offer more flexibility in premiums and can be more affordable than whole life—if everything goes according to plan.
But these policy types can also introduce risk or unpredictability that you won’t find with a simpler term life or whole life policy.
Group Life Insurance
For many of us, our first (or only) experience with life insurance happens when an employer offers a policy as part of a benefits package. Many employers provide group life insurance to full-time employees.
These group life policies typically pay a death benefit of 1 to 2 times your annual earnings if you die due to a covered cause. In many cases, coverage may be free to the employer or available for a reduced cost.
If your employer offers a group life policy, there’s no reason not to take the benefit—especially if the coverage is free. But it may be a mistake to count on your group life policy as your only coverage.
Your coverage through your employer may be at risk for any of the following reasons:
- You change jobs
- You retire
- You transition from full-time to part-time
- Your employer discontinues the benefit
- A clerical error or financial issue causes non-payment of premiums (canceling the policy)
A group life policy isn’t permanent coverage and can’t be adjusted to match your coverage needs. So, it may be better to think of a group life policy as supplemental coverage.
Why A Group Policy May Not Be Enough Coverage
While a group policy’s protection can disappear suddenly for several reasons, there’s another critical reason to consider additional coverage. For many households, a group life policy won’t provide enough coverage.
My first life insurance policy was a group policy through my employer. I was working as a truck driver at the time, one of the most dangerous professions.
Later, I moved to outside sales, again spending most of my day driving. If a roadway mishap took my life, my policy would have paid just one year of income as a death benefit. I didn’t earn much at the time.
But even for people with a higher income, a group policy’s coverage may not offer enough protection.
For example, let’s imagine you and your spouse just bought a home. You also have a baby on the way.
Let’s also assume you have an income of $50,000 per year. Census.gov reports per capita income at about $34,000.
If your group policy provides 1 year of earnings as a death benefit, your family will get $50,000 if you die unexpectedly.
The mortgage still needs to be paid, and your children still need financial support until they can provide for themselves. $50,000 isn’t enough.
For many young families with long-term financial commitments, a figure of $500,000 to $1,000,000 might be a better coverage choice.
$500,000 provides income replacement for 10 years, based on an income of $50,000 per year. $1,000,000 provides income replacement for 20 years.
You can compare rates for life insurance policies online with Policygenius. Adjust coverage amounts to suit your needs. Policygenius suggests using 10 times your earnings as a starting point, but you can choose a higher or lower death benefit.
How To Pick The Right Type Of Life Insurance Policy
Sometimes, whether life insurance is worth it for you is really a question of whether your life insurance policy matches your financial goals.
As an example, we just discussed a group life policy and why it might not provide enough coverage.
Similarly, a whole life policy might not be the best fit due to its higher costs. For other households, a term policy might not offer enough flexibility.
You can find pros and cons for each life insurance policy type. It’s also true that no single policy type can address every consideration. There’s a proper tool for every job, as my dad always said.
Prioritize your goals for the policy and look for a policy that matches your most important goals.
Term insurance may be the best choice for these situations:
- You need coverage to a specific date.
- You need a large coverage amount.
- You need coverage for a loan.
- You’re starting a new business.
- You need lower premiums.
Many term life insurance policies can be converted to permanent life insurance at the end of the term. But also consider your age at the end of the term. Rates for a permanent life policy can become pricey as you get older.
Permanent life insurance may be a better fit for these situations:
- You need lifelong coverage.
- You want flexible premiums.
- You can afford to put money in if the policy becomes underfunded.
- You want to pass wealth to beneficiaries in a tax-advantaged way.
Permanent life insurance includes whole life insurance but also includes universal and variable life insurance.
These insurance types build cash value which can let you skip premium payments or borrow against the policy. However, they can also become underfunded, requiring more money to keep the policy active.
Do You Need Life Insurance At All?
Some households don’t need life insurance at all. If you’ve built wealth, your family might not need replacement income.
Maybe you have dividend income or real estate rental income. These income sources can continue even if you die unexpectedly. And if your family doesn’t have the expertise to manage the investments, selling the investment assets can provide cash.
Similarly, if you own a business, your family can have ongoing income from the company. However, businesses don’t run themselves. Can your family can manage the business?
I’ve owned several businesses. My family couldn’t run a single one of them. It’s not that they aren’t smart; it’s that I was the resident expert in whatever it was the business did because I spent every day becoming an expert. It was my job.
If I died unexpectedly, my family would have to sell or close the business.
Businesses can be tricky to sell, though, and the process can take several months. Selling the company may not be the best way for your family to meet their financial needs.
For many business owners, a life policy can still be a wise way to protect your family.
So, Is Life Insurance Worth It For You?
If we watch carefully, life often gives us clues. One of the first clues I had that maybe I should buy life insurance goes back to the car accident at my high school girlfriend’s house.
I had just exited the car a few minutes before my dad’s parked car was destroyed by a speeding van. Had the accident happened a few minutes earlier, the story would have had a different ending.
Many of life’s risks don’t discriminate by age. But if you’re in the right financial position, you can mitigate life’s risks without a life insurance policy.
Some of us need life insurance. Some might not.
Have you built enough wealth to provide for your family? Can your assets or businesses continue earning money for your family in your absence? If not, are your assets liquid?
If the answer to any of these questions is no, a life insurance policy can be a wise investment. Which type of policy you should choose depends on your goals for the policy.
Term policies offer higher coverage amounts while keeping premiums low when compared to other policy types. At the end of the term, you may be able to convert the policy to a permanent policy if you still need coverage.
Whole life policies can be a fit for younger people when rates are more affordable. But many times, whole life policies don’t last any longer than a term policy.
People often borrow against the policy or use the cash value to pay premiums, eventually draining the policy’s cash value.
In a perfect world, a universal or variable life policy can build cash value quickly.
But do your research or work with a trusted advisor before choosing a universal or variable life insurance policy. Some policy types can bring risk because the policy can become underfunded.
If your goal is to reduce your family’s risk, you can see why you might want to purchase another policy type.
For most households, a life insurance policy makes a sound choice. But be sure to match the policy type with your goals for the policy.
If you’ve decided life insurance may be a wise choice for you, visit Policygenius to compare rates with no obligation. Choose from trusted, top-tier insurers and customize your policy to protect your loved ones if the unexpected happens.