Understand the potential benefits of life insurance in our detailed guide. Your unique circumstances will determine the right type and amount for your family.
Is Life Insurance Worth It? Weighing Pros and Cons (2024 Guide)
Compare Quotes
Via Secure Partner PolicyGenius
Updated:
Apr 13, 2024
Written by
Drew Gurley
Drew Gurley
Edited by
Sabrina Lopez
Sabrina Lopez
While many people feel life insurance is worth it, whether or not life insurance is a good investment for you depends on your unique personal finance situation.
If you have dependents you want to give financial support to if you pass away, life insurance can provide income protection and an inheritance legacy after you’re gone. In that case, a term life insurance policy or a permanent life insurance policy could make sense. On the other hand, if you have fulfilled major financial obligations, such as paying off a house or children’s college expenses, you may find that while some types of life insurance may make sense, others might not based on other financial planning strategies they have undertaken.
We at the MarketWatch Guides team have researched the pros and cons of life insurance to help you make an informed decision. Here are some things to consider when deciding if the benefits of life insurance are appropriate for you.
Understanding Life Insurance
Life insurance is a contract between the policyholder and an insurance company. A policyholder makes premium payments in exchange for a policy’s financial protections. If the policy owner passes away while the policy is in force, the beneficiaries collect a death benefit, sometimes called the face value or face amount. The best life insurance companies have a range of insurance products to meet several possible personal life insurance plans and needs.
It helps to understand what kinds of life insurance options are available and how they work so you can make an informed decision. Life insurance is available through term or permanent policies.
Term Life Insurance
Term life insurance lasts for a set period of time. Policies typically are in force for 10, 20 or 30 years, but some may be as short as a few months to a year, or extend up to 40 years or more. Premiums are level, meaning they won’t change during the policy term. However, the older you are when you buy a policy, the more you’ll pay for coverage. Keep in mind that age is only one of the variables a life insurance company considers when issuing a policy.
As a rule, term policies are cheaper than permanent policies because they don’t have savings or investment components, known as cash value. They are also cheaper because coverage is guaranteed only if the insured person dies during the specified term. After the term expires, so does the coverage.
Permanent Life Insurance
Permanent life insurance provides coverage for a policyholder’s entire life, as long as premiums are maintained. Permanent life insurance policies have a cash value component, which applies a portion of the paid premiums to an investment account that grows on a tax-deferred basis. This acts as a forced savings account; you can borrow or withdraw from it under some circumstances. For these reasons, permanent life insurance typically has higher premiums than term life insurance.
Whole life insurance policies have fixed premiums with a cash value that grows at a specified rate. With universal life insurance, the premium and death benefit can be adjusted, allowing the policyholder some financial flexibility if their budget or needs change over time. The cash value component of universal life insurance grows at money market rates, meaning you could potentially earn more than you would with a whole life policy that grows at a fixed rate.
An indexed universal life policy cash value growth rates are linked to the performance of certain financial indexes such as the S&P 500 or others.
Variable life insurance lets you choose how the policy’s savings component is invested and may include stocks, bonds and mutual funds. The upside is the potential for greater returns than those you may see with a whole or universal policy, but if your investment choices perform poorly, the death benefit can be adversely affected.
Factors To Consider When Evaluating Life Insurance
These are a few of the more common factors to consider based on your finances, protection needs and other variables unique to your situation.
Financial Protection for Your Loved Ones
Financial protection is the primary reason most individuals buy life insurance. Life insurance provides peace of mind so your family won’t struggle financially after you pass away.
Policy Options
You have several options to create financial security for your family with life insurance. You can choose between a clearly defined term length or permanent coverage for your lifetime. Adding riders allows you to further customize your policy.
Cash Value With Permanent Life Policies
Cash value is an attractive feature of permanent life insurance policies that builds added financial reserves you can tap into in the future. Also, any cash value growth is tax-deferred, and your beneficiaries don’t need to pay taxes on the death benefit.
Cost Considerations
You’ll pay more for the privilege of permanent life insurance. Consider a term life policy or a lower death benefit amount if your finances are limited. Policies designed to last your whole life are more expensive but provide you with added benefits.
Life insurance rates also increase with age. The longer you wait to buy a policy, the higher your life insurance premiums will be. If you’re a bit older and just now considering life insurance, prepare to pay more in life insurance costs than if you had taken out a policy years ago.
Medical Exam vs. No Medical Exam Policies
The underwriting process typically takes four to six weeks with a medical exam. However, this often results in the lowest rates. No-medical exam policies are issued for those with health problems, but you’ll pay a lot more when you only must answer a few questions. Plus, you’ll have to go through a period of two years before the death benefit activates.
Cost of Life Insurance
Life insurance is competitively priced throughout the industry, and while each insurer has its methodology to arrive at life insurance quotes, several factors are standard across the board. The premium you pay typically depends on the following factors:
- Age
- Health and medical history
- Occupation
- Gender
- Lifestyle
- Policy type
- Amount of coverage
Some states also let insurers factor in a FICO/credit-based insurance score when determining premiums.
Every situation is unique, and all providers have different pricing methodologies for term life insurance and permanent life insurance. To get the best price for a policy that most closely matches your needs, you consider working with an experienced independent life insurance agent or a financial advisor. Individual providers also often have calculators on their websites, or you can use MarketWatch’s life insurance calculator, which can also help you as you shop for a policy.
Common Misconceptions About Life Insurance
Life insurance is expensive. Sometimes it can be, but there are many options to lower the cost based on the type of policy you want and the amount of the death benefit. Term life is generally cheaper but has fewer benefits than permanent life insurance.
You must take a medical exam. Not necessarily. Most policies require an exam, but if you have a pre-existing medical condition and want to avoid too much scrutiny, policies that don’t require a medical exam are also available in lower amounts — but you’ll pay a lot more for skipping the exam, since it means you are riskier for the company to ensure.
Group life insurance through your employer is enough coverage. Probably not. Death benefit amounts through group life insurance are usually low, and there are limited policy options. Plus, if you change jobs, your coverage may not go with you.
You don’t need life insurance if you’re young. While you may have fewer reasons for coverage when you’re in your 20s or 30s, buying a policy when you’re young means you’ll get the best rates when you add other financial responsibilities later in life.
Pre-existing conditions disqualify you from life insurance coverage. Many times this is not the case. If you have heart disease, diabetes or other medical challenges, you can still find coverage through some providers. However, you’ll pay more than a similar person in good health.
The Bottom Line
Is life insurance worth it? In many cases, absolutely. At other times, your money may be better placed elsewhere. If you’re single or you have other sources of wealth to protect your family, then you may not need life insurance.
But if you’re like most people, you will have mortgage payments, college expenses or the need to protect your family from the loss of earnings if you pass away. Policies are also added protection for final expenses associated with end-of-life medical bills and funeral costs.
Take time to assess your needs and budget, and then reach out to a licensed agent or financial advisor to see how they can best protect you and your family as part of an overall financial planning process.
Frequently Asked Questions About if Life Insurance is Worth it
Yes, but other types of investments do not give you the combination of a large death benefit payout amount and a return on some of your premium, which is exactly what permanent life insurance offers. Your overall financial planning strategy should be a mix of investments to provide you and your family with the peace of mind and protection you need.
With a permanent life policy that builds cash value over the years, you can eventually access that cash as a loan to use for any purpose you want.
Life insurance is not about an appropriate age. It’s about buying coverage based on the circumstances in your life. It’s not that unusual for a person at age 20 to have needs similar to a person 15 or 20 years older.
