The world of insurance can be complicated, and life insurance is no stranger to complication. There are various types of life insurance products, each serving a unique purpose, and each coming with their own advantages and disadvantages.
On a high level, is life insurance worth it? We’ll be covering this common question below and answering some of the most commonly asked questions surrounding life insurance.
What Is Life Insurance?
Before diving into the details, let’s take a step back and define life insurance. What is life insurance?
In its most simplest form, life insurance is exactly what it sounds like – an insurance product that insures one’s life. Life insurance is designed to pay a death benefit to a beneficiary when the policyholder passes away.
However, peeling back the layers, life insurance can get a bit more complicated. There are numerous types of life insurance. The two most common forms of life insurance are whole life, and term life insurance.
Advantages of Life Insurance
Life insurance has plenty of advantages.Let’s review some of the advantages:
- If you were to pass away, your beneficiary will receive a financial payment for your passing, and this financial death benefit is tax free
- Life insurance policies can build a cash value, which you as the policyholder can draw against
- A life insurance policy can cover the final expense, which can be very challenging for your family to think about during a time of mourning
- If you have loved ones that depend on your for your income, you will receive peace of mind knowing you have a life insurance policy and your family can sustain their financial quality of life in your absence
Disadvantages of Life Insurance
Even though the benefits of life insurance are fantastic, let’s review some of the common disadvantages:
- A life insurance policy can be very expensive depending on your age and health condition
- Overall, the rate of return and cash value of a life insurance policy does not compete against the return of the overall stock market
- You could lose coverage if you miss any payments
- There are causes of death that would void your entire life insurance policy
What Are My Options for Life Insurance?
One of the complications of life insurance is figuring out which life insurance product is right for you. Each life insurance product serves a specific purpose.
People often compare term vs. whole life insurance, or question how long they should have a life insurance policy for. Let’s briefly review the most common life insurance policies.
Term Life Insurance
Term life insurance is life insurance that covers the policyholder for a specific term/number of years. Most commonly, a term life insurance policy will be for either 10, 20, or 30 years.
So long as the policy holder passes away during the term period, a death benefit will be paid to the policyholder’s beneficiary. Term life insurance is generally the most affordable option.
Whole Life Insurance
Whole life insurance is a life insurance policy that covers the policyholder for the duration of their life. One of the benefits of a whole life insurance policy is the fact that it builds a cash value, and that cash value could be used to fund various life expenses.
Universal Life Insurance
Universal life insurance is another permanent life insurance option. With universal life, the policies and benefits typically offer more of a custom feel. Your premiums and benefits can adjust over time.
Who Needs Life Insurance?
Although life insurance provides a great deal of benefits, this insurance product is not suited for everyone. With that in mind, who needs life insurance?
Those With Kids or Dependents
If you have children or dependents, life insurance is a fantastic insurance product you should strongly consider. In the event you passed away, you’d leave your family with an income gap they may struggle to overcome.
If you had a life insurance policy, upon your passing, your family would receive a lump sum of cash. That cash could be used to supplement your salary, and could keep the quality of life high for your family.
If you don’t have kids or dependents, a life insurance policy is likely not needed as no one is depending on your income.
People Who Face Higher Risks Daily
Those who have a riskier job should also consider life insurance. If you’re a firefighter, police officer, correction officer, tree worker, powerline worker, etc – life insurance is a very useful and practical insurance product.
Unfortunately, individuals employed in those sectors do face a higher risk of workplace fatality.
Those Without Savings
If you don’t have a large savings account, and you have a family or dependents, life insurance is helpful. This is aligned with the first point mentioned above, but even more important if you do not have a large savings account that could help sustain your family’s quality of life.
Why Should I Get Life Insurance?
If you’re questioning why should I get life insurance, consider this. Enrolling yourself in a life insurance policy is one of the most unselfish things you could do.
After all, the main benefit of a life insurance policy kicks in once you pass away. Your family, loved ones, and dependents would receive the benefit of your life insurance policy.
Protecting their well being, and reducing their stress in your absence, is what life insurance is all about.
How Much Life Insurance Do I Need?
How much life insurance do I need? That question is entirely dependent on your existing income, debt obligations, and what your family or dependents would need in your passing.
The higher income your family has grown dependent on, the more life insurance you should carry.
Life Insurance Is Not for Everyone
There’s no question, life insurance is not for everyone. But for those that could benefit from life insurance, this is an absolutely fantastic insurance product.
If you’re considering signing up for life insurance, it’s best you do it as early as possible. As you age, life insurance only becomes more expensive.
Life insurance is an important piece of financial planning, but it’s not the only one to consider. A financial advisor can take a broad view of your financial situation, and drill down on specific areas that need more coverage and attention.