As we get older, our mindset about our finances and our legacies begins to shift. We think about what will be left when we are gone, and how those we leave behind will cope. This is especially true if we have taken on big obligations, such as a mortgage or a family.
For many of us, this means considering a life insurance policy.
Life insurance coverage is often a valuable purchase. For a reasonable cost, it provides protection for our loved ones and peace of mind for us — but that doesn’t mean it’s a good buy for everyone. Here’s when to know if life insurance is worth the cost.
The types of life insurance
Before we go into whether life insurance is worth it, you should first know how life insurance works and the types of life insurance available to you:
- Term life insurance: With a term life insurance policy, you pay a certain premium on a monthly or yearly basis for a set number of years, known as a term. If you die within the term, a death benefit will be paid your beneficiary. If you die outside the set term, there is no death benefit payout. Common lengths are one-year, five-year, or 30-year terms.
- Whole life insurance: Instead of lasting a certain time, a whole life insurance policy lasts your entire life. Because of this, it is sometimes called a permanent life insurance policy. Policyholders pay their life insurance premiums, and they generally don’t have to worry about any change in their monthly premiums or benefits. Because this is permanent coverage, it typically has higher premiums than term life insurance.
- Universal life insurance: A universal life insurance policy is a form of permanent coverage but it typically more flexible than traditional whole life insurance. Like whole life insurance, universal life insurance also offers a cash value component. The difference is, you can also alter your premiums if you have enough cash value to cover the costs.
When is life insurance worth it?
In most cases, life insurance is worth it — especially if you opt for term life insurance. Some people may disagree with that conclusion, but there are many benefits to having term life coverage.
With term life insurance, you get to choose the length of the term and pay a much lower premium than with whole life insurance. You can also receive a lump-sum payout as the death benefit (and it’s usually tax-free). The primary benefit, though, is the financial protection your family receives. If you have dependents and you die, they will benefit from the financial resources your policy gives them.
Here are a few examples to show why life insurance is a good investment:
1. If you have minor children
One of the biggest reasons to purchase life insurance is to provide for your young children until they become adults.
Although it’s uncomfortable, think about the impact that your death would have on your family. Would your spouse be able to cover expenses, manage their career, raise your children and/or pets, and run the household in your absence? What about childcare — would a full-time nanny be needed to manage it all, and if so, is that what you really want?
If the answer to any of these is no, then life insurance is a great idea. Proceeds can be used to pay for your kids’ everyday expenses, school tuition, and child care. It could provide enough income for your spouse to stay home and raise the kids, rather than balancing a career and single parenthood.
Extra funds could even be set aside for things like your kids’ college tuition and weddings, or a down payment on a future home.
2. When you own a home
If you own a home, buying life insurance is often wise. This is especially true if you want your family to be able to continue living there after you’re gone, without bearing the burden of monthly payments.
Life insurance proceeds can be used to pay off the mortgage in full if you still hold a loan. It can also cover things like property taxes, annual maintenance, and the cost of unexpected repairs, even if your home is paid off.
Even if you don’t have a spouse or children, you may still want to account for your home when buying life insurance. That way, your parents, siblings, or other loved ones can keep the property in your absence, if they choose to do so.
3. If you want to replace your income
By buying enough coverage to replace your income for at least a few years, you allow your family to at least maintain the status quo in your absence without a sudden financial burden.
You can choose however many years’ worth of income you’d like to replace when buying life insurance. When calculating, take into account things such as your spouse’s own career, their ability to maintain that income after you’re gone, and the age of your children.
4. To provide for a loved one’s long-term needs
If you have a loved one with any sort of long-term needs, your life insurance policy can help provide for them for the rest of their life, even if you’re not there. This could include an aging parent, special needs child, or a spouse with medical concerns. Consider things such as medical insurance premiums, care/living facilities, therapies, and special equipment when figuring out how much coverage to buy.
5. If you have debt
When you die, the debt you leave behind won’t necessarily disappear. If you currently owe on any sort of account — from a mortgage to credit cards, an auto loan, or student loans — be sure that you understand how they would impact your estate. Then, account for this when buying life insurance coverage.
For instance, if you have co-signed student loans, the lender can technically put the loan in default status and require the total balance due immediately. This may put your co-signer in a serious bind.
Although credit cards are a form of unsecured debt, the banks will still come knocking for their share of your estate. This can eat into money that you had planned to leave to your family.
6. When your existing coverage is contingent
Many companies will offer life insurance policies to employees, often at a discounted group rate. Although this life insurance is worth buying, it can be risky if it’s your only coverage.
That’s because these policies are tied to said job. If you were to quit, change jobs, or get fired, you would lose that coverage. Depending on your age and health, it might be difficult — and expensive — to buy replacement coverage down the line.
7. Just to cover final expenses
A small life insurance policy might be worth buying if you simply want to cover final expenses, rather than leaving your loved ones to cover your funeral cost. Be sure to factor in your last wishes, funeral expenses, and perhaps even enough to cover potential medical bills if you don’t want them to impact your estate.
8. To leave a legacy
Some people choose to buy life insurance simply to leave a legacy. This might be in the form of an endowment to your alma mater or an annual scholarship. You could also choose to direct those proceeds toward a charitable cause, or even have them go toward a trust that would create generational family wealth.
Still curious about life insurance? Here are helpful answers to some of the most frequently asked questions.
How much does life insurance cost?
There is no easy way to guess how much life insurance will cost, as it depends on factors such as your age, gender, health, occupation, and even location. Additionally, the type of policy you buy (term vs. whole life, for instance) will impact the cost, as will the length of coverage term and policy value.
Overall, though, you’ll pay less for term life insurance the younger and healthier you are.
What's the difference between term and whole life insurance?
As the name suggests, term life insurance is designed to protect you for a specified period of time. If you don’t pass away during that time, your coverage expires and your premiums are gone. You’ll need to then purchase additional coverage if you want to continue being protected.
Whole life insurance, on the other hand, is a more expensive product but provides steady coverage for the rest of your life, as long as premiums are being paid. This type of policy usually builds up a cash value, as well, which can be pulled from as needed.
What age should you get life insurance?
The younger you can buy coverage, the better you can protect yourself for a lower cost. Many life insurance companies have an age cutoff; after that, they simply won’t offer you coverage. Be sure to buy as early as you can if you want to ensure protection.
This also allows you to get coverage before any potential medical issues appear.
How much life insurance is enough?
Your number is different from my number, which is different from your sibling’s number. Take into account all factors — your spouse, kids, income levels, mortgage, debt, and final expenses — when coming up with this number so you can be sure to buy enough coverage.
Many of the best life insurance companies also offer online calculators to help.
Can you cash in term life insurance?
Unlike whole life policies, term life insurance does not build a cash value. Because of this, you cannot cash it out, even if you’ve paid premiums for 30 years into the same policy.
If you want a policy that allows you to withdraw funds, consider the pros and cons of whole life coverage.
How to buy a life insurance policy
The very first step in buying a life insurance policy is calculating how much coverage you need and which type of policy to buy. Once you know that, you can spend some time researching the company that’s right for you.
Spend some time getting prices first, so you know what to expect. Many companies allow you to get quotes online in just a couple of minutes. Some have calculator tools to help you figure out whether you’re buying enough coverage.
Companies like Bestow make it even easier to apply for a life insurance policy. It’s possible to get a policy without a medical exam or lengthy paperwork. Other companies may require you to submit to additional questions or complete an in-person exam. These usually involve taking blood, saliva, and/or urine samples and getting your vitals; older individuals may also need to get more involved tests done, such as an EKG.
Once you’ve found the right policy, provided all of your information, and passed any screening tests, it’s time to pay your first premiums. Then, congratulations — you’re protected by life insurance coverage!
The final word on buying life insurance
For many of us, life insurance is definitely a worthwhile buy. It allows us to protect our assets as well as provide for the people and causes that mean so much to us. More than that, it gives us peace of mind that our loved ones will be secure when we’re gone.
Of course, coverage isn’t necessary for everyone. Your situation will determine whether life insurance is worth it for you; be sure to think about everyone and everything you’d leave behind before making your decision. When it comes to life insurance, it’s usually better to be safe than sorry.