Is life insurance worth it?
If you want to take care of someone financially after your death, probably

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When someone is counting on your income, life insurance provides peace of mind and financial stability when you pass away. Life insurance is a financial tool that pays a death benefit to your heirs when you die in exchange for monthly or annual premiums during your life.
People typically buy insurance policies to replace lost income, pay off debts or make sure their children can afford college. Learn more about what life insurance is, what it covers and when it is worth buying.
Life insurance pays a death benefit when you pass away.
Jump to insightChoose from different types of life insurance to find benefits that match your goals.
Jump to insightTerm life insurance is temporary, while a permanent policy covers your entire life.
Jump to insightTerm life insurance is typically the cheapest option.
Jump to insightPermanent insurance builds cash value that provides options in your financial plan.
Jump to insightWhat is life insurance?
Life insurance is a type of insurance policy that pays a death benefit to beneficiaries when you pass away. The amount of the death benefit and the type of policy determines how much you'll pay for the insurance coverage. The policy owner does not have to be the same person whose life is covered, but you cannot buy life insurance on someone's life without their consent.
The death benefit can go to anyone you choose. While insurance policy proceeds often go to the spouse or children of the insured, the money can go to a trust, a charity, a business partner, parents or others. The proceeds can be split among multiple parties in any ratio. Additionally, you may name secondary or tertiary beneficiaries in case the primary beneficiaries die before you do.
Some policies allow owners to add on extra benefits for higher premiums. Known as life insurance riders, these may include long-term care, disability insurance, guaranteed insurability, return of premium and waiver of premium.
When is life insurance worth it?
Evaluating life insurance needs is an important piece of the financial planning process. While many people understand the need to buy life insurance, other financial needs often seem more pressing when death seems so far away.
Additionally, buying life insurance also means facing your own mortality and financial obligations, which many people are not ready to do. For these reasons, people often focus on paying down debt or saving for a home, college or retirement ahead of buying life insurance.
The irony is that, even if other money issues seem more pressing, that's exactly why more people need life insurance. If your family has debt, monthly bills and other needs that rely on your income, what would happen if your income stopped due to your death?
Buying an adequate amount of life insurance ensures that your family has the financial means to pay off debt bills, meet monthly obligations, send kids to college and take care of other financial duties.
Nupur Gambhir, managing editor of Insurance.com, recommends life insurance for "anyone who has dependents relying on their income, such as parents with young children or spouses.”
Gambhir told us, “It’s also important for individuals with significant debts or financial obligations, as well as those who want to ensure their loved ones are financially secure in the event of their passing.”
8 reasons to buy life insurance
Here are a few worthwhile reasons that people buy life insurance:
- Replace lost income: A common rule of thumb is to buy 10 times your annual income to replace the lost income when someone dies. Even if you don't have a job, consider how much it would cost to pay someone to handle the daily tasks you perform for your family.
- Pay off a mortgage: Since a home mortgage is often a family's largest debt, many homeowners buy enough life insurance to pay off this loan. It reduces the family's monthly expenses and gives them a low-cost place to live for the rest of their lives.
- Burial expenses: Burying your loved one and paying for a funeral can be expensive and is an added expense that many families haven't planned for. The average cost of a burial is $7,000 to $12,000 as of publishing.
- College tuition: Saving for college can be expensive. With average college inflation at 12% annually, life insurance proceeds can cover this large family expense.
- Eliminate debt: Life insurance proceeds are an excellent opportunity to eliminate household debt. If the deceased owned a business, the death benefit can cover business loans, accounts payable or the remainder of a lease. It could also provide the money to pay someone to shut down or sell the business if you aren't interested in running it.
- Estate taxes: For families with a large estate, life insurance proceeds can be used to cover estate taxes without forcing the sale of investments, real estate and other assets that can trigger even more taxes.
- Partnership buyout: If you have a partner in your business, life insurance can pay for the buyout of your share when you die. This provides a financial benefit for your beneficiaries and allows your partner to continue running the company without forcing your heirs to step into the business.
- Charity: People who feel passionate about specific causes often leave money to charity in their will. A life insurance policy is a relatively inexpensive way to make a profound impact on your favorite charities.
Why life insurance may not be worth it yet
While there are numerous reasons why people buy life insurance, it doesn't make sense for everyone. If you don't have a family to support, that eliminates one of the major reasons for buying an insurance policy. In this situation, the monthly premiums can be used to build an emergency fund, max out your retirement accounts or invest through a brokerage account.
For people with a lot of debt, it may make more sense to focus on paying down your balances. Once your debt is under control, you'll have more money to purchase life insurance.
However, young people who don't have a family yet but are planning to have one in the future may also decide to buy life insurance now while they are healthy. Buying life insurance while you're younger can lock in lower insurance rates and ensure that unknown health issues don't prevent approval or cause rates to increase later on in life.
Types of life insurance
Several different types of life insurance are available to meet the diverse needs of individuals, families and business owners. These policies offer various levels of premiums, benefits and cash value based on what your goals are.
Gambhir suggests that readers "evaluate their budget, long-term goals and the specific benefits of each policy type to find the best fit."
Term life
Term life policies have a fixed monthly premium for a term that typically ranges from 10 to 30 years. Once the term expires, annual premiums tend to rise dramatically, making them unaffordable for most people to continue paying. During the initial term, these policies tend to offer the best ratio of the death benefit to the monthly premium. Many families start off with a term policy to cover their financial needs, then consider upgrading as their finances improve.
Whole life
Whole life insurance is a permanent policy that covers your "whole life." It offers fixed premiums and a guaranteed death benefit throughout the policy's life. These policies build cash value, which helps to keep premiums stable as you age. If you live to your 100th birthday, most whole life policies mature and pay out the death benefit to you instead of your beneficiaries.
Universal life
Universal life (UL) is another permanent life insurance policy that builds cash value. However, this policy does not cash out at a predetermined age. Policy owners have the flexibility to make a range of premium payments that pay for the insurance and add to your policy's cash value. The cash value grows tax-deferred for as long as the policy remains in place. The cash value is typically invested in fixed-rate securities like certificates of deposit (CDs), bonds and government Treasurys to provide a stable return on your money.
Variable universal life
Variable universal life (VUL) works very much like universal life. However, its cash value is invested in stock and bond securities that are similar to mutual funds. The performance of your underlying investments can affect your cash value and how long your policy remains in force. As your cash value increases, it is possible for the death benefit to increase based on investment returns.
Pros and cons of life insurance
Before purchasing a life insurance policy, thoroughly consider all of the pros and cons of each type of insurance. Ask your financial advisor or insurance agent what types of policies they recommend, how much death benefit you should have and how they fit into your overall financial plan.
Pros
- Cost-effective option to replace lost income when someone dies
- Tax-free death benefits can be given to anyone you choose
- Multiple types of life insurance to match your needs
Cons
- Term life insurance may expire before you die
- Permanent life insurance premiums are often expensive
- Evaluating how much life insurance you need can be challenging
FAQ
When is life insurance not worth it?
Life insurance is not worth it when the premium payments are too high relative to the death benefit. Additionally, people who are not financially supporting anyone typically do not have a need to buy life insurance. However, if you are planning on having a family in the future, buying an insurance policy while you are young and healthy can lock in lower rates to save money in the long run.
Is life insurance a good investment?
Life insurance is primarily a financial tool that addresses the risk of a person dying too soon. It is a good investment in the sense that you can get a large death benefit for a small amount of monthly premiums. While term insurance does not build cash value, permanent policies are often treated as investments because they invest money into stock or bond-like securities.
When should I buy life insurance?
Buying life insurance is a smart choice when you have people who rely on your income. Many people start out with term life insurance because it tends to offer the highest death benefit with the lowest monthly premiums. As your finances improve, you may consider buying a term policy with a longer period of coverage or upgrading to a permanent policy.
Can I be denied life insurance?
Yes, it is possible to be denied based on the details of your application. A life insurance company may decline your application depending on preexisting health conditions, your age or lifestyle choices (like skydiving or rock climbing) that pose a significant risk. Additionally, if you lie on your application, the company can deny you or cancel your policy when they find out.
Bottom line
People purchase life insurance to reduce their risk of financial loss when someone dies. Life insurance death benefits can be used to replace lost income, pay off debt, cover college tuition and more.
There are many different types of insurance policies available to meet your goals, budget and time frame. Comparing policies can be challenging, so it is wise to involve a financial planner or insurance agent from one of the best life insurance companies to get their advice in choosing the right policy for your situation.
Article sources
- Progressive Casualty Insurance Company, "What is a life insurance rider?" Accessed July 5, 2024.
- Aflac, "Can you take out a life insurance policy on anyone?" Accessed July 5, 2024.
- Quotacy, "How Many Beneficiaries Can You Have? Can You Split Benefits?" Accessed July 5, 2024.
- Lincoln Heritage Funeral Advantage, "How Much Does a Funeral Cost?" Accessed July 5, 2024.
- John Hancock, "Life insurance: what's your number?" Accessed July 5, 2024.
- Education Data Initiative, "College Tuition Inflation Rate." Accessed July 5, 2024.
- Quotacy, "Denied Life Insurance? Here’s Your Next Move." Accessed July 5, 2024.
- Aflac, "Average term life insurance rates." Accessed July 5, 2024.
- Northwestern Mutual, "How Whole Life Insurance Works." Accessed July 5, 2024.
- Lincoln Heritage Funeral Advantage, "How does whole life insurance work?" Accessed July 5, 2024.
- Guardian, "Universal life insurance." Accessed July 5, 2024.
- Thrivent, "How variable universal life insurance works: features, pros, cons, and more." Accessed July 5, 2024.