Is Life Insurance Worth It?

Life insurance has been called everything from a good defensive game plan to a love letter written to the people in your life you care the most about.

But despite strong warnings that pop up promoting life insurance –  “Whatever excuses you have for not carrying life insurance now will only sound ridiculous to your widow,” one internet admonishment goes – nearly half of Americans don’t carry a life insurance policy.

Two basic questions regarding life insurance seem simple enough to answer:

Is life insurance worth it?

Should I buy life insurance?

But inside those questions are a tangle of considerations that entail financial goals, tax benefits, number, and age of dependents if any, how much insurance is enough and what kind of insurance you need, permanent or term.

“People should think about whether their family would be able to continue living comfortably without their income,” Jiten Puri, CEO of Policyadvisor.com, said.

“They should think about what would be left behind if they unexpectedly pass away. Like mortgage payments, debt, daily living expenses, etc. and whether their family could manage without the financial support provided by a life insurance policy.”

Reasons To Get Life Insurance

Many good reasons to carry life insurance fall under the peace-of-mind umbrella but are not limited to simply making sure your death doesn’t jeopardize the financial health of loved ones.

Life insurance can provide a number of protections:

• Replacing income lost after your death.
• Ensuring there’s money to pay for your burial and funeral expenses. (The median cost for a funeral and burial is $7,848, according to the most recent statistics.)
• Covering future tuition costs of dependents.
• Providing an inheritance.
• Growing the cash-value component of permanent life insurance policies.
• Stabilizing your family’s financial future by relieving your dependents of accrued debt.

Reasons to Not Get Life Insurance

Individual circumstances determine if life insurance is a necessary cost. A healthy single person joining the workforce just out of college might not need any more protection than an employer-provided life insurance benefit that costs the employee nothing.

There are reasons why life insurance might not be a necessary investment:

• You don’t have any dependents.
• You simply cannot afford the premiums.
• You have sufficient financial resources to protect your dependents or a financial strategy that grows your wealth through more lucrative investments.
• You’re older and the premiums could end up costing you more than the payout.

“Given the extraordinary leverage and tax favorability of life insurance, it is extremely rare to beat it,” Kevin Ross, Financial Advisor at Cape Securities, Inc. said.

“However, if someone has established a highly liquid net worth well in excess of what a person or family needs and has a highly liquid investment that is consistently earning rates of return so high that it exceeds the tax-advantaged return of insurance, then they may not need life insurance.”

Types of Life Insurance

Let’s say you decide you need and want life insurance for whatever reason: tax benefits (payouts are not taxed); to replace your income as your family’s top-wage earner; building cash value for your retirement years; simple peace of minds; all of the above.

Now what? The two main types of life insurance are term life and permanent life.

As the name suggests, in a term life insurance policy you pay a premium for a certain number of years – often between 10 and 30 years.

A permanent life insurance policy, by contrast, doesn’t expire until the death of the policy holder.

Permanent Life Insurance

Unlike a term policy, permanent life insurance covers an individual for as long as he or she lives. Like term policies, the payout to beneficiaries is tax-free.

Cash value grows in a permanent life insurance policy because the premium you pay is split into different categories: the death benefit itself, the insurer’s cost, and the cash value of the policy.

Individuals who want to guarantee a death benefit no matter how long they live (provided they keep up with the premiums) would benefit from a permanent life insurance policy.

Cash value grows tax-deferred and can be accessed while the individual is still alive, a potential benefit for those wanting to bolster their finances in retirement.

Within permanent life insurance policies, people can opt for whole life insurance, universal life insurance and variable life insurance. The options offer life-long coverage and cash value components but differ in other ways.

“If a person is very conservative, whole life resonates,” Ross said. “If a person is moderate, index universal life resonates. If a person is aggressive, variable universal life resonates.”

Whole life is the most straightforward type of permanent coverage with the premiums and payout fixed.

“Universal or variable may be better options for people who want to manage their policy’s investment component themselves, with the main difference being that investments with variable insurance are more volatile and riskier, but with higher potential returns,” Puri said.

Pros of Permanent Life Insurance

Permanent life insurance carries the advantage of a guaranteed death benefit. The cash-value accumulation is a key element of long-term financial planning that distinguishes permanent life insurance policies from expiring term policies.

Individuals who can afford the significantly higher premiums of permanent life insurance policies like the tax advantages and also the potential for borrowing against the policy when necessary. Remember, though, taking a withdrawal or carrying a loan balance will mean a reduced death benefit for your beneficiaries.

Understanding the specific benefits of both term insurance and permanent life insurance for older individuals should be part of retirement planning and  is critical to the financial literacy of seniors looking to clear debt and/or protect their loved ones once they’re gone.

Cons of Permanent Life Insurance

The No. 1 drawback to permanent life insurance policies, the reason why some individuals opt for term life instead or carry no insurance at all, is cost. Permanent life insurance is much costlier than term life.

Also, depending on the type of permanent life policy, the death benefit may diminish over time. One of the benefits – borrowing against the policy in a time of need – can become a drawback. If you don’t pay back the loan, your death benefit will be reduced.

Certain permanent life policies require the same attention you give (or don’t give) to your investments in order for the benefits to outweigh the cost.

“Some policies can be difficult to understand if you choose to manage investments yourself,” Puri said.

Speaking of those other investments, if your financial focus is to build wealth and you have a qualified investment advisor helping you reach your goals, that advisor might recommend better ways to build wealth than carrying a permanent life insurance policy.

Term Life insurance

Term life insurance is the top choice by far for young families with significant financial needs. Those needs make paying permanent life insurance premiums prohibitive in the short term but also make providing financial protection crucial in the long term.

Term life insurance policies often stretch from 10 to 30 years and carry a fixed payout that can replace income and cover college expenses should the family breadwinner die.

Pros of Term Life Insurance

Since term life insurance policies don’t accumulate cash value, the premiums are not nearly as costly as permanent life insurance policies.

You can customize a term life insurance policy to cover a certain number of years and provide a specific payout amount, offering flexibility along with peace of mind. Also, some term life policies can be converted to permanent life insurance if your needs or financial goals change.

Ross, who considers permanent life policies the better financial option, calls term life “the 2nd best way to get the insurance coverage you need and (it) does so with the least amount of capital required. It may not be the most cost effective, but it requires the lowest capital investment.”

Cons of Term Life Insurance

The old bromide about getting what you pay for could apply to term life insurance upon expiration of the policy. There is no cash value, or investment opportunity, and only the worst-case scenario (death of the policy holder) brings a financial benefit.

If after 20 years you want further term life insurance protection, you will likely become familiar with another common saying: the prices have gone up. Your premium at age 55 versus 25 will reflect the age process even if your bathroom mirror doesn’t.

What Is the Price of Life Insurance?

To say the cost of life insurance varies is an understatement along the lines of Chief Martin Brody getting his first glimpse at Jaws and saying, “You’re gonna need a bigger boat.”

Age, health, gender, and lifestyle are all factors affecting life insurance pricing, but they don’t affect pricing nearly as much as the type and amount of life insurance coverage.

The general rules: women will pay less than men; youth will be served a less expensive premium than older folks; term is cheaper than permanent and the monthly premium on a 10-year policy will be less expensive than a 30-year policy.

US News & World Report estimates a 40-year old woman in good health will pay approximately $183 a month for 30-year $1 million term life policy while a man of the same age and health status can expect to pay $40 more.

The difference is greater between term and whole life insurance (the most expensive of permanent life policies) with the same woman paying slightly over $1,000 a month for a $1 million whole life policy. The man in this same scenario might be up-charged as much as $290 a month.

Determining Your Life Insurance Needs

Estimating your life insurance needs isn’t much different than making a family budget. At least in practice. In reality, it can be far more challenging.

For example, it can be particularly difficult to navigate life insurance options for seniors, and the benefits those you leave behind will gain. You first need to take stock of your financial resources, both in the present and future.

Those can include present income, investments, Social Security, and pension benefits, 401 (k)s and, if you’re still working, the group life insurance provided by your employer.

Compare those resources to the future needs and expenses of your beneficiaries. Is your goal to cover your dependents until they’re out of college? To help pay for your grandkid’s college tuition? Is your goal to leave a financial legacy to your children and grandchildren?

Weighing those resources against estimated expenses of your beneficiaries can be overwhelming, taking into account everything from their everyday living expenses to major debts such as mortgage, credit cards, car loans and/or student loans.

If you’re carrying significant debt, as many Americans are, it might be difficult to see your way clear to add a life insurance premium to your expenses.

Consulting with a financial advisor or taking advantage of free nonprofit credit counseling can bring clarity to your financial state and help you realistically assess your life insurance needs and costs.  Lack of education, or more precisely confusion, forces some individuals to go without. People with health issues face even more uncertainty.

Matt Schmidt, CEO and Agent at Diabetes Life Solutions, points to bait-and-switch tactics that only serve to complicate decision-making.

“Nearly every advertisement on TV, radio and the internet always show the ‘lowest rates’ possible,” Schmidt said. “Even when a person does an online quote those rates shown are not reflective of their health profile 90% of the time.

“As an example, a person with diabetes tries to obtain a quote and is shown a rate of $15 a month for $500,000 of life insurance coverage. This sounds and looks amazing. Then, they go through the application process and final rates are $80 to $100 a month. Due to a bait and switch approach, many people are turned off, angered, and walk away from the offer and may not pursue life insurance again.”

There are many respected insurance brokers who can help you assess your needs. But it can be helpful to consult experts who don’t necessarily have a stake in a decision that can mean the difference between fitful nights and peace of mind.