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Is life insurance worth it?

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Buying a life insurance policy can help you financially protect your loved ones if you pass away. If you’re unsure whether or not you need life insurance, Bankrate’s insurance editorial team discusses the potential benefits and alternatives here. The best life insurance companies on the market offer diverse policy options so that you can personalize your coverage to your individual needs.

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. 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 subtract from your death benefit. 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. Still, it could be an attractive option when you need additional cash.

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. 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.

Frequently asked questions

Is term or permanent life insurance a better option?

You may be wondering what life insurance companies offer and which type of insurance is best for you. 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.

Should I have a life insurance policy if I have no children?

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, you might consider setting up a death benefit for them. If you take care of an elderly parent or sibling with a disability, you may consider life insurance that could help finance their care after your death. Even a business partner may benefit from your life insurance policy to protect their finances.

Can life insurance help me to leave a legacy to my favorite charity?

Yes, you can choose a charity, church 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.

Should I use my life insurance policy as my main savings account?

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, low-risk mutual fund. Depending on your risk tolerance, there may be other options that can earn you a better return on your dollar. A financial advisor can help you determine the best choice for your individual needs.

Written by
Mary Van Keuren
Insurance Contributor
Mary Van Keuren has written for insurance domains such as Bankrate, Coverage.com, and The Simple Dollar for the past five years, specializing in home and auto insurance. She has also written extensively for consumer websites including Reviews.com and Slumber Yard. Prior to that, she worked as a writer in academia for several decades.
Edited by
Insurance Editor