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Life insurance can be a valuable tool to protect your loved ones from financial difficulties in the event of your death. But paying for something you might not end up using can seem like a waste of money. Even if your policy ends up paying a death benefit, the premiums can be expensive.
So is life insurance worth it? So you can decide if it’s right for you.
How does life insurance work?
When you take out life insurance, a contract is formed between you and the life insurance company. You pay periodic premiums in exchange for a death lump sum paid to your beneficiary (or beneficiaries) on your death.
This death benefit can be used for any purpose. Oftentimes, the funds help cover larger expenses that your loved ones may struggle to pay for in your absence, such as: B. Funeral expenses, mortgage payments, college tuition, and other bills.
Related: How does life insurance work?
There are two main types of life insurance, each with features that are beneficial in certain situations. When deciding whether life insurance is worth it, you should first consider what type of insurance makes the most sense for you.
term life insurance
The first is term life insurance. As the name suggests, it is designed to cover you for a specific term, during which your premium and death benefit do not change. Terms are usually 5, 10, 15, 25 or 30 years.
You pay premiums while the policy is active and if you die during that time, your beneficiary will receive a death benefit. When the term ends, you may be able to renew the policy each year thereafter, but you will pay higher rates each time you renew. If you do not renew, the insurance cover ends and no payment is made.
Term life insurance can be a good option when losing an income would leave your family financially vulnerable. In this case, term life insurance acts as a safety net.
Suppose you are in your 30s, married and have young children. You might also have a mortgage. You can get term life insurance to ensure your spouse doesn’t suffer financially if you die prematurely. Once your children are older and your debts are paid off, having life insurance for that purpose may not be as important to you.
Term life insurance is usually cheaper than other types of life insurance.
Permanent Life Insurance
Permanent life insurance is exactly what it sounds like. These policies generally don’t expire – as long as you keep up with the premium payments. Long life insurance policies also typically accumulate cash value on a tax-advantaged basis. Countervalue money can be withdrawn or borrowed. (A withdrawal or loan balance means a reduced death benefit for your beneficiaries if you die.)
There are several types of perpetual life insurance, including whole life insurance and universal life insurance.
The exact rules of perpetual life insurance and its cash value portion depend on the type of contract and the individual insurer. However, perpetual life insurance is more expensive than term life insurance.
How much does life insurance cost?
Here are examples of life insurance quotes based on a 30-year-old male of average height and weight for $500,000 coverage. As you can see, a whole life policy would cost $4,323 per year, while a 30-year life policy would only cost $357 per year.
Examples of life insurance costs
The average cost of life insurance varies widely based on health and age, gender, the amount of the death benefit, the type of policy (i.e., term or permanent), and more.
For example, according to our research, a 20-year policy with $500,000 coverage is 19% more expensive for a 30-year-old man than for a 30-year-old woman.
How old you are when you take out a policy can also have a dramatic impact on your premium. Buying term life insurance at age 40 instead of age 30 can increase your life insurance rates by 36%. Waiting until age 50 to buy can increase costs by up to 212%.
Pros and cons of life insurance
To decide whether buying life insurance is a good idea, it helps to weigh the pros and cons. In many cases, the advantages of life insurance far outweigh the disadvantages. But life insurance may not be for everyone. The following must be observed.
Benefits of life insurance
- Financial protection for family members. This is the main reason for purchasing life insurance. It gives you peace of mind that when you die, your family will not face financial difficulties.
- variety of options. When it comes to choosing life insurance, you have a variety of options. It’s usually possible to find a policy that fits your family’s needs and budget.
- monetary value. When you buy perpetual life insurance, it usually has a cash value component that can grow over time. You can avail these funds during your lifetime.
- tax benefits. Any increase in cash value is tax-advantaged. In addition, your beneficiaries do not have to pay any tax on the death benefit. (The exception is where the death benefit goes into a taxable estate, which with proper planning can be avoided.)
Disadvantages of life insurance
- to absorb costs. While you can benefit greatly from life insurance, these are additional costs that you need to plan for. A young family might find it difficult to budget for additional regular expenses.
- The acquisition costs increase with age. The longer you wait to buy a policy, the higher the premiums are likely to be. If you’re a little older and just considering life insurance, prepare to pay more than if you bought a policy years ago.
- Medical history can increase life insurance rates. Certain risk factors, such as obesity, high blood pressure, or smoking, usually increase life insurance rates because your life expectancy is shorter.
Is life insurance worth it?
If you’re single, your family has enough money to survive, or no one is financially dependent on you, you probably don’t need life insurance.
On the other hand, if you have dependents who depend on you financially — or if you have debt that would burden your family if you die — life insurance is probably worthwhile. It is valuable financial protection and often part of a solid overall financial plan.
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