Is Life Insurance Worth It?
B.A. Risk Management
Life Insurance Agent
It is often said that life insurance is meant only for those who need it. The larger question, however, is – who really needs life insurance?
Is it only needed for people with dependents? Or is it also necessary for people who are single? Is it only needed for people who have a stay-at-home spouse? Or can dual-income couples also benefit from it?
In this article, we discuss these issues in great detail and also help you understand the importance of life insurance, how it works, whether it is worth buying, and if so, when is the right time to buy it.
What Is Life Insurance and How Exactly Does It Work?
With a term policy, you can buy coverage for a specific number of years. If you pass away while your policy is in effect, your beneficiaries will receive a lump-sum payment.
With a permanent life policy, you can buy coverage that lasts your entire lifetime. Whenever you pass away, your beneficiaries will receive a lump-sum payment. If they spend it all at once or all in one place that’s their prerogative.
In addition to this, you also have access to living benefits such as cash value and dividends which is outstanding even in a lower tax environment, depending on the type of policy you buy.
Regardless of whether the payout is from a term or permanent policy, lump-sum payments from life insurance are tax free.
Who Needs Life Insurance?
The answer to this question is rather simple. Life insurance is needed for anyone who needs to replace their income after their death.
There are a number of reasons why you – irrespective of your marital status – might want to replace your income in the event of your death.
If You Have a Stay-At-Home Spouse
If you have a spouse who does not work and depends on your income, you definitely need life insurance.
If you pass away during your prime earning years, your spouse might struggle to make ends meet and take care of your family’s financial needs. Ideally, your life insurance coverage should be sufficient to replace your income for 10 years.
If You Have Kids
Children, needless to say, are a major financial responsibility, especially if you belong to a middle-income household. Childcare alone can cost you a lot of money, in addition to which you have to plan for their education as well which means they should not spend too much or borrow too much on a major that does not pay that much or anything at all but this is another topic.
So, your life insurance coverage should be sufficient to cover the amount of money you are likely to spend on childcare and education. How much life insurance you buy depends on the needs of your financial dependents.
If You Have a Mortgage
A mortgage is probably the biggest financial obligation you will take on in your life. In the event of your untimely death, your family is likely to struggle with the repayments, which might force them to downgrade their lifestyle drastically.
To avoid the possibility, a life insurance policy which covers your mortgage balance is absolutely necessary.
If You Are Carrying Personal Debt
Studies show that the average American carries approximately $38,000 in personal debt, which does not include mortgage.
Needless to say, it is too large a burden to pass on to your family. So, if you have substantial personal debt (credit cards and personal loans), you need to insure yourself.
If You Have a Spouse Who Works
Many people are under the misconception that dual income families do not need life insurance. They assume that since both spouses work, the family’s financial needs can be taken care of, even if one of them were to pass away.
It is, however, not true in most cases. In dual income households, couples usually pool their income to meet their ongoing financial needs.
If one of them were to pass away, the other would most certainly find it difficult to make ends meet with one income alone. So, even if you have a spouse who works, it might be a good idea for you to have life insurance coverage.
If You Are Single
Now, this might come as a surprise to many of you, since it is against the commonly-held belief that single people do not need life insurance.
There are, however, many reasons why you might need life insurance, even if you are single.
If you have significant student loan debt, you might need life insurance coverage. While federal student loans are usually discharged in the event of your death, it might not be the case with private loans, especially if your parents or siblings happen to be co-signers.
To avoid passing on the burden of your student loan debt to them, you need a life insurance policy.
If you have family members (aged parents or disabled siblings) who are dependent on you, you can make sure that their needs are taken care of in your absence with the help of a life insurance policy.
Buying a life insurance policy is one of the easiest ways to make sure your final expenses are taken care of, in the event of your untimely death. While no one likes to think about death while they are young and healthy, it is something you need to plan for, especially if you do not want to burden your family with living expenses after you are gone.
Term Life Insurance vs. Permanent Life Insurance
You generally have two types of life insurance to choose from – a term life insurance policy or a permanent life insurance policy (like whole life insurance). Term is the type of life insurance that most people buy.
Upsides of Term Insurance
- Covers you for a specific amount of time period – when your financial responsibilities are at a peak.
- You only pay for the amount of coverage you need.
- Extremely affordable, especially if you are young and do not have any pre-existing conditions.
Downsides of Term Insurance
- Only covers you for a 10 – 30 year term. If you still need coverage after the expiry of your policy, you will have to either renew it every year or apply for a new policy, both of which can be expensive.
- Only pays a death benefit to your beneficiaries and does not offer any living benefits like a permanent policy does.
Upsides of a Permanent Life Policy
- Covers you for your entire life – irrespective of the changes in your health condition.
- Premium is locked in for the entirety of the coverage period.
- Offers living benefits in the form of cash value and dividends, depending on the type of policy you buy.
- Flexible premium payments (in case of a universal life policy).
Downsides of a Permanent Life Policy
- Costs way more than a term life plan.
- Tends to accumulate cash value at a slow rate (in case of a traditional whole life or universal life policy). Policies with high growth potential (indexed or variable), on the other hand, are subject to market conditions.
So, which one is the right choice for you? It really depends on your current financial situation and your long-term financial needs.
Buying a permanent life policy makes sense only under the following circumstances.
- If you have a dependent (a child with special needs or a disabled sibling) that needs to be taken care of for the rest of their life.
- If you want to use the cash value portion of the policy as an emergency fund for your post-retirement life.
- If you want to leave a legacy for your loved ones.
- If you want to provide your loved ones with a sum of money to cover the federal and local estate taxes as well as various outstanding bills and debts.
If the aforementioned scenarios are not applicable to you, a term life policy is the best option for you. For not much money it can provide you with a substantial amount of life insurance coverage.
If you are a 35-year old non-smoker who is in good health, you can buy a 20-year term policy with $500,000 of coverage for less than $30 a month.
Rather than spending a lot of money on a whole life policy, you can buy a low-cost term life policy and invest the rest of the amount into an IRA, mutual funds, and commodities to build a nest egg for your retirement. It's important to note here that most personal finance professionals will tell you that permanent life insurance is not a good investment.
When Is the Right Time to Buy Life Insurance?
This is yet another question which often pops up while discussing the topic of life insurance. Many people tend to buy life insurance only after they get married, have a child, or buy a house. You can, however, benefit by buying a life insurance policy at a young age.
Age, in case you did not know, is the most important factor which determines the cost of your policy. The older you are, the higher the life insurance premiums will be.
Moreover, the older you get, the more likely you are to develop various health problems, in which case the insurance company is likely to charge you more compared to what they charge a health person.
Above all, when it comes to term as well as permanent life policies, the premiums are locked in at the start of the coverage period.
So, it makes sense to buy a policy when you are young and healthy, since you are assured of the lowest possible rates.
Exam vs. No Exam
Life insurance companies offer fully underwritten policies (to apply for which you need to undergo an exam) as well as no exam policies (which do not involve any lab tests or exams).
Generally speaking, a fully underwritten policy is the better option for you, since it costs less than a no exam policy.
If you are young (25 to 35 years of age) and do not have diabetes, high blood pressure, heart disease, and other such problems, you are likely to be assigned the lowest risk class.
If, on the other hand, you are really averse to the idea of undergoing a medical exam, you can apply for a policy with digital insurance companies like Haven Life, Ladder, and Ethos, all of which allow you to buy life insurance coverage online without undergoing any tests.
So, Is Life Insurance Worth It?
The short answer to this question is – yes, it is totally worth it.
Life insurance is a great way to provide your loved ones with a financial safety net in your absence. In today’s age, the loss of a breadwinner can be too big of a burden to bear, especially for middle-class and lower middle-class households.
With life insurance – whether it is a term life or a permanent life policy – you can make sure that your family does not suffer financially in your absence.
Life insurance – term life insurance in particular – is very affordable in most cases. Barring exceptional cases (if you have severe health problems, family history of degenerative disorders, if you smoke and drink regularly, or if you work in a high-risk profession), the insurance premiums are usually much lower than most people think it is.
A 20-year, $500,000 term life policy is likely to cost you $1 a day – if you are young and healthy enough to qualify for the lowest risk class (Preferred Best/Preferred Plus/Preferred Elite). It is certainly worth investing in, even if you believe that you will outlive the policy.
Perhaps the biggest benefit of life insurance is the peace of mind it offers you. You can rest assured knowing that your family is capable of taking care of their day-to-day as well as long-term financial needs, thanks to the death benefit payout. You cannot put a price on it!
Choosing the Right Policy
There is no dearth of options when it comes to life insurance providers and the products they offer. So, buying life insurance coverage can be tricky, particularly if you do not know what to look for in a policy.
If you find yourself in a similar situation, you can get in touch with a life insurance agent at noexam.com.
We can talk to you, assess your life insurance needs, and recommend the right products based on your age, health status, income level, the size of your family, and your long-term financial needs to get you an accurate life insurance quote. To learn more about life insurance, contact us today!