If you’ve found yourself wondering, “Is life insurance worth it?” you’re not alone. It can be hard to decide if a policy is a good idea, especially since life insurance is designed to primarily benefit someone else — your beneficiary — after you pass away. While life insurance can have perks for its policyowners, that’s not its main purpose, and that can make purchasing and maintaining a policy feel like a waste of precious budget. However, life insurance is a good idea for many, and understanding life insurance pros and cons can help you decide if a policy is right for you. Bankrate’s editorial team, which includes a licensed life insurance agent, can show you how to decide if you should buy a life insurance policy.

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Key takeaways
  • Life insurance can provide peace of mind and help you know your loved ones will be financially cared for after your death.
  • Permanent life insurance offers tax-deferred growth in the form of cash value accounts.
  • Term life insurance is often the cheapest option, but it doesn’t offer the cash value incentive.
  • You typically have to qualify for coverage based on your health status.

Is life insurance a good investment?

The answer depends on your circumstances. If you have dependents, a life insurance policy can give them financial security after your death. You may have financial responsibilities such as childcare, college or mortgage expenses that your family would struggle to keep up with if you passed away. A life insurance policy can give you the peace of mind that your loved ones would be able to keep up with these expenses by using the death benefit that pays out following your passing.

Permanent life insurance can also be part of a tax-deferral financial strategy intended to avoid paying taxes on savings until you are in a lower tax bracket, presumably when you retire. There are other ways you can do this, such as IRAs and 401(k) plans, but if you’ve maxed out your investment with them, life insurance can play a vital role in protecting your money.

Remember, though, that the primary goal of life insurance isn’t to ensure tax-deferred savings, but rather to provide financial security to your loved ones in your absence.

Benefits of life insurance

If you’re still wondering “Should I get life insurance?” you may want to think more about its benefits. Life insurance is designed to give your loved ones financial security after your death. However, each different type of life insurance policy may have other benefits as well.

Replaces your income

The primary purpose of a life insurance policy is so that you know your loved ones — your spouse, children or even beloved friends — will be able to maintain their financial stability should you pass away. Life insurance can be used to replace the income you would have provided. Any type of life insurance policy can help provide this benefit, which is one of the main reasons someone would purchase a policy. The death benefit can help ensure that other responsibilities — such as school tuition, mortgage payments and even basic expenses like bills and food — can be paid for.

Leaves a legacy

If your loved ones won’t need financial assistance after you pass away, you could use a life insurance death benefit to leave a financial gift to a charity or organization. This could be appealing if you have worked with organizations during your life or feel passionate about certain causes.

Relieves stress on loved ones

The death of a loved one, and the responsibilities that follow, are stressful. The stress is often made even more apparent when combined with the grief of loss. Having a life insurance policy — even a small one — can help make this time easier. The payout from a life insurance policy can provide the funds to pay for funeral costs, flowers, grief counseling and other services.

Offers tax-deferred growth

You will generally pay higher premiums if you have permanent life insurance, but one of the reasons for this is that a portion of that premium will be set aside in a cash value account for you. As long as you continue to pay your premiums, the policy will remain active and your savings will continue to build, although with most policy types the amount is relatively low. While cash value won’t make you rich, it is a nice perk of permanent policies. If you withdraw your cash value, though, it could affect the death benefit amount that is paid to your beneficiary.

Gives you loan options

You can also take a loan out against permanent life insurance policies, and the interest rate is often much lower than you’d get at a bank. Your life insurance policy might provide you with some peace of mind, knowing that you have more financial options than you would otherwise. However, taking loans against your life insurance does have repercussions. You don’t have to pay the money back, but if you pass away before the loan is repaid, your death benefit will be lowered by the amount you owe, so your beneficiary will get a lower payout.

Drawbacks of life insurance

While many people can benefit from life insurance, it isn’t always the best solution for everyone. Life insurance has pros and cons, and understanding both can help you decide how to proceed. Here are some drawbacks to consider before you purchase a life insurance policy.

Life insurance might be expensive for some

The cost of life insurance depends heavily on your age, health, and the policy type and death benefit amount you choose. Young and healthy people typically get the best rates on life insurance. The older you are and the more health issues you face, the more expensive life insurance will generally be. However, the high cost of coverage may be most noticeable with a permanent life insurance policy compared to a term life policy, which are typically much cheaper. In many cases, life insurance is less expensive than you’d expect, but price is certainly a consideration.

You may have to pass a medical exam

Many life insurance policies require a medical exam. The results of the exam will determine if you qualify for coverage or how much coverage a life insurance company is willing to give you. However, you can get life insurance without a medical exam. If you are facing severe health risks, you could even opt for guaranteed-issue life insurance. These options may be more expensive than the coverage you could get with a medical exam, but for some shoppers they could be the best choices.

You may need to spend time educating yourself

There are multiple terms to understand when you buy life insurance. For instance, there are different types of policies, benefits and riders to make sense of, which can make comprehending your coverage options difficult. Because life insurance is an important financial purchase, though, it’s important to take the time to make sure you understand the product you are buying. Before you buy a policy, you may want to consult a financial expert to help you fully understand what you are signing up for and committing premiums to.

Term life is “use it or lose it”

Although term life insurance is typically the cheapest type of life insurance, if you do not pass away within the policy term, your policy expires with no benefit to you. Some companies offer the ability to renew your policy, although your new age and health status could affect the rate you’ll pay, and some companies offer the option to convert your term policy into a permanent policy upon expiration. You could also consider purchasing a return of premium rider, which means that if you don’t pass away during the policy term, you’ll get your premiums back when the policy expires. These policies are typically more expensive on a monthly or annual basis, though, so be sure to keep that in mind.

Other options to consider besides life insurance

Life insurance may not be the best option for everyone. Although you should work with a licensed professional to determine the best path for you, you could consider the following alternatives to certain aspects of life insurance policies:

  • Investing in the stock market: If you are comfortable with risk, the stock market may be a good way to grow your wealth over time. This option is usually best suited for those who plan on holding their investment for an extended period of time, usually for 10 or more years. While you generally do have to assign a beneficiary to your accounts, the amount your beneficiary would get if you pass away is variable based on how your investments are performing.
  • Certain health insurance policies: Some life insurance policies have living benefits that allow you to use some of your death benefit if you are facing a chronic, critical or terminal illness. You may also be able to access some of your death benefit if you need long-term care. Buying certain health insurance policies can also provide similar benefits.
  • Self-funding: If you have the ability to, you could choose to set aside money in a separate savings account for use in the event of your passing. This likely isn’t a viable option for most households; saving an amount equal to the death benefit of a traditional life insurance policy would require a rather aggressive savings rate.

Frequently asked questions

    • If you’re deciding between term and permanent insurance, you may want to consider how the policies differ and what your needs are. Term life insurance generally works best for people who only want coverage for a set amount of time. Permanent life insurance, on the other hand, remains in effect for your whole life, as long as you pay your premiums. Term life insurance is typically cheaper and could make sense if you only want coverage for a period of years — such as your kids’ childhood or as long as your mortgage remains in effect.
    • Even if you don’t have children, you may want to consider purchasing a life insurance policy. If you have a partner who would be financially impacted by your passing, a death benefit could be helpful to them. If you take care of an elderly parent or sibling, you may consider life insurance for your family, which could help finance their care after your death. Even a business partner may benefit from your life insurance policy to protect their finances. You could even opt to buy life insurance if no one relies on your income; you could assign a charity or organization as your beneficiary so that you leave a financial gift upon your passing.
    • Yes, you can choose a charity, church, foundation or other entity as your life insurance policy’s beneficiary. Single people without children may consider this option to leave a legacy with their favorite organization.
    • Many financial advisors advise against using your life insurance policy as your main savings account. You can typically earn a higher interest rate on your savings if you invest it in a well-managed, relatively lower-risk mutual fund. Depending on your risk tolerance, there may be other options that can earn you a better return on your dollar; the cash value in permanent life insurance policies doesn’t usually accrue at a very high rate. A financial advisor can help you determine the best choice for your individual needs.