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Life insurance is one of many options for estate planning, and it can be exceedingly important for some—or an unnecessary expense for others. Whether life insurance is worth it for you requires balancing the cost of various policies, your current life circumstances and your expected future ones.
Approximately 54% of Americans are covered by some form of life insurance, according to 2020 data from the Life Insurance Marketing and Research Association (LIMRA). It comes in two main categories; one is term insurance, which only lasts for a set time period and is therefore more affordable. The other is permanent life insurance, which includes whole life and universal life. These premiums cost more, but they never increase and you're covered your entire lifetime.
Benefits of Life Insurance
The cost of life insurance premiums absolutely could be worth it for those in certain situations.
- Buying life insurance at the right time can give you peace of mind that those dependent on your income, such as young children, your spouse or elderly parents, will be provided for if something happens to you.
- If you don't have much savings, you'll rest easy knowing your funeral costs, debts and other final expenses won't fall on your family. For example, your spouse can use it to continue paying the mortgage.
- While some insurers won't cover death by certain risky activities, others will. So those who have high-risk professions or hobbies can use life insurance to protect their families. Read the policy's fine print so you know what's covered.
- Unlike term life insurance, permanent life insurance is considered a financial asset and can be borrowed from during your lifetime.
- If you own or co-own a business, life insurance can help cover expenses or debts when you are gone.
- If you have a large estate, you can use permanent life insurance as a part of your estate planning, especially since (depending on the policy) the benefit has cash value and is tax-free for beneficiaries.
Drawbacks of Life Insurance
Life insurance isn't right for everyone, however, and has its downsides.
- It could be too expensive for those on tight budgets, which unfortunately is sometimes those who could get the most out of life insurance (for example, young parents of small children).
- Policies may cost more depending on your habits and medical history, such as if you smoke, are overweight or have medical conditions like heart disease or cancer. If you partake in risky hobbies often, like skydiving, rates may be high. Life insurance rates are also typically slightly higher for men.
- Not everything is covered; for example, some policies don't cover death by suicide within the first one to two years of the policy. Some policies have other exclusions, such as if you die doing a risky activity prohibited by the policy, doing something illegal or in an act of war. Check the exclusion policy carefully.
- If you have a term life plan and are alive when it ends, you lose the money you paid in premiums (though having the safety net in the interim could be worth it). Some term life insurance policies can be converted to permanent policies to avoid expiration.
- Life insurance is priced by risk, so it costs less the younger you are—but young people are statistically the least likely to die. Let's look at a comparison from insurance company Policygenius of a 20-year term life insurance policy for $500,000 of coverage. On average, the monthly premium for a 25-year-old female is $21.24 per month, and for a 25-year-old male, $27.16 per month. If these individuals waited until they were 45 to get their coverage, the same policy would cost the female $47.79 and the male $61.05 per month.
Which Type of Life Insurance Is Best?
The best type of life insurance and how much coverage you need depends on your budget, your current situation and expected future needs.
Term Life Insurance
This policy is for a specific time period, with options typically ranging between 10 and 40 years. It's commonly used during someone's earning years to replace their income. For example, parents with young children who want to ensure the kids are supported and can attend college should one or both parents die. Term life insurance premiums are more affordable than permanent life insurance, so it may be the best option for those on tight budgets and who are most concerned about coverage over the next few decades.
Term life insurance provides a guaranteed death benefit if you pass away, but it typically doesn't have any cash value if the policy ends while you're still alive. Depending on the insurer, though, you may be able to renew it or convert it into a permanent policy. Some term insurance comes with a renewal guarantee, where you can start a new term right away at a higher premium (since you're older and therefore riskier) but without a medical exam or other evidence that could make your rate higher or deem you ineligible.
Permanent Life insurance
This policy covers you for your lifetime, as long as your premiums are paid. Premiums are pricier than term life insurance, but they never go up, even as you age and your health deteriorates. A permanent policy may be preferable for those who are getting married and want to ensure their spouse is always financially secure.
Permanent life insurance comes in several forms, including whole (ordinary) life and universal life. Whole life is the most common; you pay a fixed premium regularly for a specific amount of coverage. The policy may earn dividends and accrue interest, and you can borrow from its cash value in your lifetime.
Universal life also provides lifetime coverage, though it's more flexible and may allow for an increased death benefit upon medical evaluation. It's best for those who prefer to adjust coverage and premium amounts over time. Once your account grows to a certain amount, you can use your balance to cover the costs of the premiums.
Just be aware that with either type of permanent policy, if you borrow from it or use it to pay premiums and you die before repaying the outstanding balance, the insurer will subtract that amount from the death benefit to your beneficiaries.
The Bottom Line
If you're single, or your family has adequate finances, you may not need to spend money on life insurance. But if you have loved ones who are financially dependent on you, or you carry debt that won't disappear upon your death, the cost of premiums can be worth the peace of mind and future benefits if you can make it work for your current budget.
If you're nervous to risk the expense, don't forget you can save money by opting for term insurance, and rates are lower if you're young and healthy. Be aware that in some states, it's legal for insurers to consider your credit when determining rates, so it's wise to check your credit and potentially aim to improve it before you apply.