Is Life Insurance Worth It?
Term life insurance provides inexpensive protection
Life insurance can provide a lump sum of money when someone dies, which can ease the financial burden of a loved one’s death, or help your loved ones better carry on without you. The simplest form of life insurance is term insurance, which is a relatively inexpensive form of basic life insurance protection.
In this article, we’ll focus on whether life insurance is worth owning, and when it makes the most sense.
What Is Term Life Insurance?
Life insurance provides a death benefit (or a lump sum payment) to beneficiaries when an insured person dies. Policies that can last a lifetime are referred to as permanent or cash-value life insurance. Policies that last for a specific number of years—20 or 30 years, for example—are called term life insurance policies.
Term life insurance is designed to cover a life insurance need for a certain number of years, such as while you’re raising children. To keep a life insurance policy in force, you pay premiums to an insurance company at an agreed upon rate—you can typically pay monthly, quarterly, or yearly.
To get a life insurance policy, you apply with an insurance company. The company may review your health history and ask questions to evaluate your application. If you’re approved, you can keep the policy for as long as the term lasts (or your entire life if you purchase a permanent policy), or you can stop paying premiums if you no longer need coverage.
Term life insurance typically has lower premiums than so-called “permanent” policies with the same death benefit, but coverage ends after the term.
How Much Should You Spend on Term Life Insurance?
If you’re like most people, you need to decide how to allocate monthly and annual expenses. Spending too much money on life insurance makes it hard to save for other financial goals and meet your daily needs. On the other hand, being underinsured can be risky and leave beneficiaries in financial distress.
Start with an evaluation of how much insurance you need. Think through why you’re buying life insurance, who you’re protecting, and how their needs might change over time. Several techniques—including a conversation with an insurance professional—can help you determine an appropriate amount.
It’s best to do a thorough analysis of your needs, but you can get a ballpark idea of what you need with rules of thumb. One approach suggests that you multiply your income by 10 (or more). Then, add $100,000 to help with each child’s education expenses. For example, if you make $100,000 per year and you have one child, you’d apply for at least $1,100,000 of term life insurance.
To get the most coverage for your premium dollar, a term policy often makes the most sense—especially if you don’t expect to need life insurance past a certain number of years. But if you’ve established a coverage amount that meets your needs and the premiums are too high for your budget, you may need to make difficult decisions. You can reduce the amount of insurance you buy, or you can make changes in other areas of your budget.
Coverage with term insurance can be surprisingly affordable. The chart below illustrates how much a 30-year-old non-smoking woman might pay for a 20-year term policy:
|Coverage Amount||Health Status||Monthly Premium|
It may be possible to keep premiums manageable by using multiple insurance policies, such as a combination of a short-term and a long-term policy. If your coverage needs decrease and the short-term policy ends, you no longer need to pay for coverage.
For example, instead of buying a 20-year policy for $1 million, you could buy a 10-year policy for $600,000 and a 20-year policy for $400,000. If you build up assets and pay down debt over the next several years, your need for insurance decreases (because assets, such as savings, help cover this need).
After the first policy ends, you would only pay premiums on one policy. In this way, you cover your entire upfront insurance need, but save premium dollars as that need diminishes.
You might think to simply purchase only a shorter policy upfront for a higher coverage amount, say a 10-year policy for $1 million, and then in 10 years, purchase a second policy for $400,000, once the first expires. But the cost of insurance increases as you age, and you may develop a condition or habit that also increases the cost of coverage or makes you uninsurable.
It’s generally best to purchase insurance sooner (if you know you’ll need it) rather than later.
How Should You Measure the Benefit of Term Life Insurance?
While permanent life insurance policies offer additional features, term life insurance provides two crucial benefits.
The death benefit, or face amount, is the amount beneficiaries receive if an insured person dies. That money can replace income, pay off debts, cover final expenses, and provide assets to fund financial goals, such as a child’s college education or to pay off a mortgage. Without the death benefit, a family may be left in extreme hardship.
In many cases, beneficiaries don’t owe taxes on the proceeds of a life insurance policy.
Peace of Mind
An untimely death is tragic, and the emotional impact is more important and immediate than any financial consequences. But having adequate insurance can provide peace of mind, leaving you or loved ones with one less thing to worry about. If you’re concerned about how your family will cope after an unexpected death, you may find satisfaction in knowing that you’ve minimized the financial impact.
When Is Life Insurance Worth It?
Life insurance provides financial resources when someone dies. If there’s no need to protect anyone or provide funds at death, you might not need life insurance. But if anyone would benefit from receiving money, or might in the future, life insurance may be worthwhile.
If you have nobody depending on you and you’re confident that you never will, life insurance would be unnecessary. However, life can change, and it’s important to acknowledge that.
A common use for life insurance is to protect family members when a parent dies. When a wage-earning parent dies, the family loses income, and the consequences can be catastrophic. But the death of a non-working parent can also be problematic. The surviving family members may need to arrange care for children, which could incur additional expenses. The alternative is for a working parent to stop working, which isn’t realistic for most families.
Money from life insurance eases the burden on survivors, who might use the money to pay off debt and put money toward future expenses. For example, if you have a home loan and you’d like to set money aside for a child’s education, life insurance can help eliminate debt and provide education funding.
As with any insurance, the primary use for life insurance is to pay a relatively small premium to protect against catastrophic consequences. It’s often wise for families to at least purchase a term life insurance policy on both parents.
Term vs. Permanent Insurance
Term insurance policies provide a death benefit for a specific number of years, after which the policy expires. Permanent insurance policies, such as whole life insurance, also pay a death benefit. But those policies can last for longer than term policies (ideally your entire life), and you pay higher premiums in order to build up cash value inside the policy. The cash value is the means by which a permanent policy can last throughout your life.
If your primary goal is to protect against an untimely death (before “old age”), it might not make sense to pay higher premiums for a permanent policy.
If you only need insurance until your children are self-sufficient, your partner has accumulated assets, or you’ve paid down the mortgage—a 20- or 30-year term policy would probably cover you.
- Life insurance provides a death benefit.
- Term policies typically have lower starting premiums than permanent policies for the same death benefit, but coverage ends after the term expires.
- The amount of coverage you buy should take your beneficiaries’ needs and your budget into account.
- When your budget is tight and your insurance need will end after 20 or 30 years, term insurance might be an excellent solution.