Whether or not you currently have life insurance, you may be wondering if life insurance is worth it. In many situations, life insurance is a worthwhile investment, as it can provide a death benefit that is more than many can save in their lifetime. However, life insurance has its drawbacks and may not be right for everyone, especially if you do not have dependents or anyone who would experience financial loss when you pass away.

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Key takeaways
  • Life insurance can provide peace of mind, offering tax-deferred growth and the ability to borrow from your cash value account if you buy permanent life insurance.
  • Term life insurance is often the cheapest option for those needing a large coverage amount without 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.

Although life insurance can be a part of your investment plan, it should never be the whole thing. 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

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. For instance, you may be able to borrow against your life insurance’s cash value account or withdraw money from it during your lifetime.

Provide peace of mind

As stated, the primary purpose of a life insurance policy is so that you know your loved ones — your spouse, children or even beloved friends — will maintain a comfortable standard of living if you should die. 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 isn’t designed to make your heirs rich, but can help ensure that other responsibilities, such as school tuition and food, can be paid for.

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 savings vehicle for you. As long as you continue to pay your premiums, the policy will remain active and your savings will continue to build, with interest added as it’s earned. The interest rate will be relatively conservative — you won’t make as much as you might in the stock market, for example. However, it could be a safe way to save money with little risk.

Borrow on your cash value

Once you have a nest egg built up in your permanent life insurance policy after the first decade or so, you could borrow on that money if you need it. However, cash value accumulates slowly, so it can take years to have enough built up to access for personal use. For example, if you’ve had your policy for 20 years, you may have accumulated enough to pay for your child’s college tuition. Keep in mind that any money borrowed from your cash value account would likely subtract from your death benefit if not paid back to the policy before your death.

While you won’t necessarily need to pay the money back — as long as the amount borrowed doesn’t exceed your account’s cash value — you may want to consider how the withdrawal would affect your loved ones before going through with heftier loans. Additionally, loans against permanent life insurance typically come with an interest rate that is much higher than the growth rate earned by the cash value. Still, it could be an attractive option when you need additional cash.

Drawbacks of life insurance

While many people can benefit from life insurance, it isn’t always the best solution for everyone. There are some drawbacks to consider before you purchase a life insurance policy.

Life insurance can be expensive

Young and healthy people typically get the best rates on life insurance. Rates are personalized, depending on your coverage needs, age, health, lifestyle, family history and occupation. The older and more health problems in your immediate family, 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.

Not everyone qualifies

If you do not meet the health or height and weight guidelines set out by the insurer, you might not qualify for life insurance. This can also be true if you have a pre-existing medical condition, which is anything you were seen by a doctor, treated, diagnosed or prescribed medication for. Even if you qualify, your medical history could make the policy too expensive to afford.

Life insurance can be confusing

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 difficult. Before you buy a policy, make sure 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 use it, you lose it. This means if you outlive your term life coverage, your policy cancels and the premiums you paid do not go toward a payout. If you still need life insurance after your term policy expires, your new rate will be based on your current age and health status.

Alternatives to life insurance

Some single individuals without children choose to purchase life insurance if they take care of a parent or sibling or have a business partner or employees who would struggle financially without them. They may also want to purchase a life insurance policy to pay out to a church, charity or individual in need. However, life insurance may not be the best option for everyone. Often, single individuals without dependents aren’t concerned with providing financial protection to another person if they pass away.

If buying a policy from a life insurance company isn’t the best move for you, there are a few compelling alternatives, including:

  • Investing in the stock market: If you are comfortable with risk, the stock market traditionally earns good returns for those who invest wisely. 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. If you’re not stock-savvy yourself, a mutual fund or another vehicle could invest the money for you.
  • Long-term healthcare policy: Some life insurance policies will pay out a portion of the death benefit if you get sick, but you may find more financial benefit from purchasing a long-term healthcare policy instead. This insurance type covers you for a chronic illness or disability and pays for things like nursing care.
  • Mortgage insurance: If you are primarily concerned with paying off your home’s mortgage if you fall ill or pass away, you may want to consider mortgage insurance as an alternative to life insurance. A mortgage insurance policy can protect you from default and pay your mortgage if you are incapacitated or die. It can also ensure that your heirs do not have to worry about monthly payments until the house is sold.

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