Is Life Insurance Worth It?
Is life insurance worth it?
Life insurance is an insurance policy that pays out when your life ends – so what’s the point in including it in your financial plan? Is it worth it? Whether life insurance is worth it is highly dependent on your financial situation and your goals.
Is life insurance worth it for me?
To determine if life insurance is worth it for you, it helps to understand how life insurance is typically used. Generally, when you purchase life insurance, you pay regular premiums over your lifetime and then upon your death, your beneficiaries receive a lump sum payment. That lump sum payment can be used for your funeral expenses, to cover the cost of your missing income in the case of a spouse, or for other purposes like a child’s college education, etc.
Life insurance can also be used as a savings vehicle with tax-deferred growth. With a permanent life insurance policy, the premium that you pay acts as a savings vehicle and gains interest. While this isn’t as much interest as you might earn in other investment accounts or stocks, it is another way to diversify and save. You’re also able to borrow against certain types of life insurance policies if you’ve built up a cash value.
Types of Life Insurance
There are several types of life insurance, with different benefits depending on your financial situation.
Term Life Insurance
Term life insurance lasts for a term, which can vary – the term might be set upon a certain number of years or a specific age. Your premiums remain the same during the length of the policy, but when you acquire the policy matters. For example, the younger and healthier you are, the less you’ll likely pay.
Term life insurance doesn’t act as a savings vehicle, and you can’t borrow against it as it doesn’t have the cash value component. Because of this, term policies are often a cheaper option.
Permanent Life Insurance
Permanent life insurance never expires as long as you continue to make payments, and they also accumulate a cash value, so that you may borrow against the policy or make a withdrawal. In that aspect, permanent life insurance acts as an investment vehicle. Because it has the cash value component, permanent life insurance policies are typically more expensive than term policies.
Within permanent life insurance, there are a few types: whole life, universal life, and variable life insurance. Whole life insurance has fixed premiums and the cash value grows at a specified rate. With a universal life policy, the benefits may be adjusted over time if necessary and the cash value grows at money market rates. A variable life insurance policy gives you the flexibility to choose how the savings part of the policy is invested, but you may have to pay more fees than the others types of permanent life insurance policies.
There are also life insurance policies that are designed just to provide for funeral expenses, these may be called final expense policies, and they are permanent policies with a guaranteed death benefit.
How to determine if life insurance is right for you
To figure out if life insurance is right for you, speak with an insurance expert and a financial advisor. You’ll want to see how insurance fits into your financial picture as a whole and if it would be a good investment for you. Your life, goals, and family structure all play into your decision.