Life insurance can be a valuable investment, as it helps provide financial security for your loved ones after you pass away. If you’re wondering if life insurance is worth it, consider the degree to which someone else would be impacted by the absence of your income. Understanding life insurance pros and cons can help you decide if a policy is right for you.

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Key takeaways

  • Life insurance can help provide financial security for your loved ones.
  • A life insurance policy can serve as income replacement after your death. It may help cover monthly expenses, debts, college education and child or dependent care, among other things.
  • However, life insurance can be expensive, and you may have to qualify based on your health status.

Is life insurance a good investment?

Whether or not life insurance is a good investment depends on your circumstances. If you have dependents, a life insurance policy can help provide financial support 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 offer peace of mind in knowing your loved ones would receive a death benefit that pays out following your passing.

Some policy types, like permanent life insurance, can also be part of a tax-deferred financial strategy to help 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.

Learn more: Types of life insurance

Benefits of life insurance

Life insurance is an investment — one you may pay into for decades — so it’s important to consider the pros and cons of life insurance policies to find the right coverage for your needs. Here are some of the benefits of purchasing life insurance.

Replaces your income

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 because the policy lasts your lifetime instead of expiring after a certain number of years. A portion of that premium will be set aside in a cash value account. The cash value will continue to grow tax-deferred for as long as it remains in the policy. But if you remove the cash value, it could affect the death benefit amount that is paid to your beneficiary and any earned interest that is withdrawn may be considered taxable income.

Whole life insurance offers a guaranteed interest rate, which allows the cash value to grow slowly over time. Universal life insurance has more flexibility and can potentially build interest faster, depending on the specific policy you choose. Experts recommend consulting an insurance agent to figure out what’s ideal for your situation.

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. Here are some of the drawbacks of purchasing life insurance.

Life insurance might be expensive for some

The cost of life insurance depends heavily on your age, health, 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 is 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 may be used to determine if you qualify for coverage or how much coverage a life insurance company is willing to give you. However, you may be eligible for 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

When looking into life insurance, you may encounter lots of new vocabulary. 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, you may want to consult a financial expert to help you fully understand what you are signing up for.

Term life is “use it or lose it”

Although term life insurance is typically the cheapest, if you do not pass away within the policy term, your policy expires with no payout to your beneficiary. Some companies offer the ability to renew your policy, although your new age and health status could affect the cost. Other companies offer the option to convert your term policy into a permanent policy prior to 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 insurance agent to determine the best path, you might 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 a portion 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 not attached to a life insurance policy may 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 strategy can provide similar benefits so long as you’re diligent about making contributions and committed to not dipping into the money for other expenses.

Frequently asked questions

    • The best life insurance company offers the policy type you want, including the coverage and benefits that make the most sense for your situation. Once you determine your needs, gathering quotes from several carriers can help you figure out which one offers the best price. Bankrate’s analysis found that some of the best life insurance companies in various categories include Guardian, Mass Mutual, Nationwide, Mutual of Omaha, Northwestern Mutual, Prudential and State Farm.
    • 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.
    • Whether you have children or not, 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 might look into 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; it could help protect their finances and keep the business going. You could also opt to buy life insurance if no one relies on your income to help cover end-of-life medical expenses or funeral costs. Or, you could assign a charity or organization as your beneficiary so that you leave a financial gift upon your passing.
    • Most experts advise against using life insurance as your main savings account. Life insurance is not designed for the policyholder to withdraw money from; it’s meant to be there when you pass. Plus, 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, too; 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.