Whether or not to purchase life insurance is a decision that depends on individual circumstances and needs. While it can be an important consideration for many people, it may not be necessary for everyone. That’s why in this article, we’re going to take a moment to discuss when and where purchasing a life insurance policy may make sense, and when someone may be better off saving their money.
Reasons why people buy life insurance
One good way to determine whether or not you may need to purchase a life insurance policy is to examine why others choose to purchase one. And while there are probably 100’s of reasons we could list, here are 5 of the most common ones we encounter or a daily basis:
- Protecting dependents: One of the main reasons people buy life insurance is to provide financial support to their dependents in the event of their death. If you have children, a spouse, or aging parents who rely on you for financial support, life insurance can help ensure that they are taken care of in the event of your unexpected passing.
- Paying off debts: Life insurance can also be used to pay off any outstanding debts you may have, such as a mortgage or car loan. This can help prevent your loved ones from having to bear the burden of these debts after your death.
- Covering final expenses: Funeral and burial expenses can be costly, and life insurance can be used to cover these costs, helping to ease the financial burden on your loved ones during a difficult time.
- Supplementing retirement income: Certain types of life insurance, such as permanent life insurance, can also be used as a savings vehicle and can provide a source of supplemental retirement income.
- Business needs: If you own a business, life insurance can be used to fund a buy-sell agreement or to provide key person coverage for a key employee.
Types of life insurance policies
There are several types of life insurance policies available, each with its own unique features and benefits. Here are three common types of life insurance policies:
Term life insurance
Term life insurance provides coverage for a set period of time, such as 10, 20, or 30 years. It’s typically the most affordable type of life insurance, making it a popular choice for young families and those on a budget. Term life insurance pays a death benefit to your beneficiaries if you pass away during the term of the policy, but it does not build cash value.
Here are some pros and cons of term life insurance:
- Affordability: Term life insurance is often the most affordable type of life insurance policy available, making it a great option for those on a budget.
- Flexibility: Term life insurance policies can be tailored to meet your specific needs and budget, with coverage options ranging from 1 to 30 years.
- Simplicity: Term life insurance policies are generally straightforward and easy to understand, with a fixed premium and a guaranteed death benefit.
- Convertibility: Many term life insurance policies offer the option to convert to a permanent policy without a medical exam, giving you the ability to lock in coverage for life.
- No cash value: Unlike permanent life insurance policies, term life insurance does not accumulate cash value, meaning you won’t have access to any savings or investment options.
- Limited coverage period: Term life insurance policies only provide coverage for a set period of time, so if you outlive the policy, you won’t receive any benefits.
- Premium increases: While term life insurance premiums are typically fixed for the length of the policy, they may increase if you choose to renew the policy after the initial term expires.
- No equity: Since term life insurance policies don’t build cash value, you won’t be able to borrow against the policy or use it as collateral.
In summary, term life insurance offers affordability, flexibility, simplicity, and convertibility, but it lacks the cash value and equity-building benefits of permanent life insurance policies. The limited coverage period and potential for premium increases are important factors to consider when deciding whether term life insurance is the right option for you.
Whole life insurance
Whole life insurance provides lifelong coverage and includes a savings component known as the cash value. Premiums for whole life insurance are typically higher than those for term life insurance, but the policy offers a guaranteed death benefit and builds cash value over time. This cash value can be borrowed against or used to pay future premiums.
Here are some pros and cons of whole life insurance:
- Guaranteed death benefit: Whole life insurance policies provide a guaranteed death benefit, which means that your beneficiaries will receive a payout when you pass away, regardless of when that happens.
- Cash value accumulation: Whole life insurance policies also accumulate cash value over time, which can be borrowed against or used to pay future premiums.
- Fixed premiums: Whole life insurance premiums are typically fixed for the life of the policy, which can make it easier to budget for.
- Tax benefits: The cash value of a whole life insurance policy grows tax-deferred, which means you won’t have to pay taxes on the growth until you withdraw the money.
- High cost: Whole life insurance policies are generally more expensive than term life insurance policies, which can make them harder to afford for some people.
- Limited flexibility: Once you’ve purchased a whole life insurance policy, you may not be able to change the coverage amount or premium payments.
- Complexity: Whole life insurance policies can be complex and difficult to understand, which can make it hard to compare policies from different providers.
- Lower investment returns: While the cash value of a whole life insurance policy can be borrowed against, it typically doesn’t offer the same level of investment returns as other types of investments.
In summary, whole life insurance provides a guaranteed death benefit and the ability to accumulate cash value over time, but it comes at a higher cost and with less flexibility than term life insurance. The tax benefits and fixed premiums are attractive features, but the complexity and lower investment returns may be drawbacks for some people.
Final expense insurance
Final expense insurance is a type of whole-life insurance that is designed to cover end-of-life expenses, such as funeral and burial costs. It typically offers lower coverage amounts than other types of life insurance policies, and the premiums are often lower as well.
Here are some pros and cons of final expense insurance:
- Affordability: Final expense insurance policies are typically less expensive than other types of life insurance policies, making it easier for people on a budget to get coverage.
- Simplicity: Final expense insurance policies are often simple and straightforward, with easy-to-understand terms and conditions.
- Guaranteed issue: Final expense insurance policies may be available on a guaranteed issue basis, which means you can get coverage without having to undergo a medical exam or answer any health questions.
- Peace of mind: Final expense insurance can provide peace of mind, knowing that your final expenses will be covered and your loved ones won’t have to bear the financial burden.
- Limited coverage: Final expense insurance policies typically provide coverage for only a small amount, which may not be enough to cover all end-of-life expenses.
- Age restrictions: Final expense insurance may not be available to people over a certain age, such as 85 or 90.
- Guaranteed issue final expense policies will contain a graded death benefit which will place restrictions on when the policy will provide coverage for natural causes of death.
- Potential for overpaying: Because final expense insurance policies are often marketed to elderly or low-income individuals, they may have higher premiums or lower benefits compared to other types of life insurance policies.
In summary, final expense insurance can be an affordable and simple option for people looking to cover their end-of-life expenses, but it comes with some limitations, such as limited coverage and potential age restrictions. The lack of cash value and the potential for overpaying are also important factors to consider.
Pros and Cons of owning any life insurance policy
Now that we’ve taken a look at some of the most common types of life insurance policies and discussed some of their pros and cons, let’s not take a look at some of the pros and cons of owning “any type” of life insurance policy.
- Financial protection: Life insurance provides financial protection for your loved ones in the event of your unexpected death. It can help cover living expenses, pay off debt, and provide for future expenses such as education or retirement.
- Estate planning: Life insurance can be an effective tool for estate planning, helping to ensure that your beneficiaries are provided for and that any estate taxes are covered.
- Peace of mind: Knowing that your loved ones will be taken care of in the event of your unexpected death can provide peace of mind.
- Tax-free benefits: The benefits paid out from a life insurance policy are generally tax-free, providing additional financial benefits to your beneficiaries.
- Cost: Whole life insurance policies can be expensive, and even term life insurance policies can add up over time.
- Limited coverage: Some life insurance policies may have limitations on coverage or exclusions, which can make it difficult to get the coverage you need.
- Qualifying: In some cases, you may not qualify for a life insurance policy if you have certain pre-existing health conditions or if you engage in risky behaviors.
- No cash value: Term life insurance policies do not accumulate cash value over time, so you won’t have any savings or investment options.
- Unnecessary coverage: Depending on your circumstances, you may not need a life insurance policy, and the premiums you pay could be better used elsewhere.
Personal considerations one should take into account
Here are some factors to consider when deciding if you need a life insurance policy:
- Dependents: If you have dependents, such as children or a spouse, who rely on your income to cover living expenses, you may want to consider getting a life insurance policy to ensure that they are financially protected if something happens to you.
- Debt: If you have significant debt, such as a mortgage or student loans, that would be difficult for your loved ones to pay off without your income, a life insurance policy can provide a safety net.
- Estate planning: Life insurance can also be used as part of an estate plan to help cover estate taxes or provide an inheritance for your beneficiaries.
- Age and health: Your age and health can also be factors to consider when deciding on a life insurance policy. Generally, the younger and healthier you are, the less expensive a policy will be.
- Final expenses: Even if you don’t have dependents or significant debt, you may still want to consider a life insurance policy to cover your final expenses, such as funeral costs.
- Lifestyle: Your lifestyle can also be a factor to consider. For example, if you have a dangerous job or hobby, you may want to consider a life insurance policy to ensure that your loved ones are protected in case of an accident.
Life insurance can also benefit the living insured
Some term and whole life insurance policies will allow applicants to purchase additional benefits which can be added to the policy which can benefit the insured while they are still alive. These benefits are commonly referred to as “living benefits”. Some of the most common living benefits include:
- Accelerated death benefits: This benefit allows policyholders to receive a portion of their death benefit if they are diagnosed with a terminal illness or other qualifying medical condition.
- Long-term care benefits: Some life insurance policies may provide long-term care benefits that can help pay for the cost of nursing home care, assisted living, or other long-term care expenses.
- Chronic illness benefits: Similar to accelerated death benefits, this type of living benefit allows policyholders to access a portion of their death benefit if they are diagnosed with a chronic illness.
The availability and terms of living benefits will vary depending on the type of policy and the insurance provider.
To find out how much your life insurance will cost, you can follow these steps:
- Determine your coverage needs: The first step in determining how much your life insurance will cost is to figure out how much coverage you need. Consider factors such as your income, debt, and dependents to determine how much coverage you would need to ensure that your loved ones are taken care of in the event of your unexpected death.
- Choose a policy type: Once you have determined how much coverage you need, you can choose the type of life insurance policy that best suits your needs, whether it’s term life insurance, whole life insurance, or final expense insurance.
- Get quotes: You can get quotes for life insurance policies from various insurance companies. It’s important to get quotes from multiple providers to compare prices and find the best coverage at the most affordable rate.
- Complete an application: Once you have chosen an insurance provider, you will need to complete an application to apply for a policy. This will typically involve providing personal and medical information, as well as information about your lifestyle and habits.
- Underwriting: After you have submitted your application, the insurance provider will review your information and determine your risk level. This process is known as underwriting, and it is used to determine the cost of your premiums.
- Receive your policy: If you are approved for coverage, you will receive a policy outlining the terms and conditions of your coverage, as well as the cost of your insurance.
The nice thing about all of this is that the process of applying for life insurance is free regardless of whether or not you are approved for coverage or choose to accept the policy being offered to you in the end.
This means that, if you think for any reason you may need to purchase a life insurance policy for you or a loved one, it never hurts to apply for coverage and first find out if you can qualify, and then second decide if the price of coverage is worth it to you!