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Alani Asis
June 6, 2024
Life insurance is worth it if you have people who rely on you financially. However, it may not be worth it if you don't have dependents and can't afford to pay for coverage.
Life insurance falls into two categories: term life insurance and permanent life insurance. Whether a certain type of insurance is worth it for you depends on your budget, coverage needs, and financial goals.
Who needs life insurance?
Consider life insurance if you…
- have dependents who rely on your income
- have significant debts or financial liabilities
- are a homeowner with mortgages
- are a business owner wanting to ensure business continuity
- want to leave an inheritance for your children, grandchildren, etc.
- are a caregiver for dependents with special needs or elderly parents
- are a high-net-worth individual with estate planning needs
Life insurance may not be necessary if you…
- are single with no dependents
- are a retiree with enough savings
- have minimal debts
- have significant assets to cover debts and final expenses
- have adequate insurance through work
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Life insurance should be a supplement to your investment strategy. d3sign/Getty Images
What are the reasons to have life insurance?
Protects your loved ones
"If you don't make it home and someone relies on your income to live, you need life insurance," says Mark Williams, CEO of Brokers International. Life insurance ensures that people who rely on are financially protected even after your death. Your death benefit (the proceeds of your policy) can replace your income, pay for household services, or keep your business running in the event of your passing.
Covers debts and final expenses
If you share a mortgage or credit card debt with someone else, your coverage kicks in to cover those outstanding obligations if you pass away. Your life insurance policy can also pay for end-of-life expenses, like your funeral ceremony or medical bills, giving your loved ones the space to grieve your passing properly.
Potential to accumulate wealth
A permanent life insurance policy offers a cash value component. Depending on your permanent policy type, this feature grows your policy from interest earnings or investment gains. You can withdraw or borrow from your cash value to fund financial goals such as paying a down payment on a home or increasing your retirement income. You can also use it to increase your death benefit or gift the proceeds to your heirs.
Factors that impact your life insurance needs
To find the best life insurance for your needs, you'll have to determine what those needs are. You'll want to consider the following factors when assessing your needs.
Your financial situation
Your budget guides the amount of insurance you can get, as you shouldn't more than you can afford. A term life insurance policy costs significantly less than a permanent one and should suffice for most people with temporary financial needs. However, it can be a worthwhile investment if you have lifelong dependents or can spare more in premiums to pay for a permanent life policy.
Type of coverage
As mentioned, the most significant perk of a term life policy is its affordable price for a large amount of coverage. Policyholders also appreciate the simplicity of the policy as it doesn't have a cash value aspect and requires little oversight. It's worth mentioning that most term policies don't pay out, meaning you'll likely not get a return on your investment.
On the other hand, permanent life insurance is the way to go if you require lifelong coverage, particularly if you have long-term dependents. It's more expensive than term life because a portion of your premium goes towards your cash value. However, unlike term life, the policy guarantees a death benefit payout (as long as you make your premium payments) and offers the potential to build wealth.
There are various types of permanent life insurance policies. The main ones are whole life, universal life, and variable life insurance. Other policies are variations of the three.
Amount of coverage
After deciding on the type of policy to purchase, decide how much coverage you need. Consider the "DIME" method when calculating your coverage needs: the sum of your debt and final expenses, income, mortgage, and children's educational expenses minus any current savings or life insurance policies you already carry.
Online calculators exist to calculate this figure. However, speaking to a financial advisor or an independent insurance agent can give you a more accurate estimate of your needs.
Age and health
Your age and health affect premiums and policy availability. Younger and healthier individuals often qualify for better rates and terms. However, younger individuals may not have the financial capacity to afford permanent life insurance.
If you're a young shopper with a limited budget, you may start with a term life policy with a term conversion rider. This converts your policy to whole life insurance without going through the underwriting process again, allowing you to switch to permanent life insurance when your income increases.
Older individuals or those with health issues may be limited in the type of policies they can get. If this is you, consider non-traditional policies like no medical exam life insurance. These policies allow those with elevated risk factors to qualify for coverage by providing a medical exam exemption.
However, no medical exam insurances tend to provide limited coverage and higher premiums than the standard policy.
Resources for financial planning and investing
The goal is to make the best decisions based on your financial goals and budget. To maximize life insurance benefits, it's wise to include a financial advisor, accountant, and estate attorney in your decision-making process to ensure you have proper coverage that adapts as your life changes.
If cost is a concern, below are some resources to get started at no cost to you.
- Most banks and credit unions have financial planning services that are free for customers.
- The FDIC has free financial literacy and management resources through its Money Smart program that teaches you how to save and invest.
- Your community college or state university may offer free personal finance courses, like the ones offered at the University of Illinois at Champaign-Urbana, Duke University, Purdue University, and Missouri State University.
- CashCourse is available to college students whose universities participate in the Higher Education Financial Wellness Alliance (HEFWA).
- Consider a robo-advisor like Fidelity Go that has no account minimums and low fees.
Is life insurance worth it FAQs
Do I need life insurance if I'm young and healthy?
You may not need life insurance if you don't have dependents, especially if you're financially constrained. In fact, your work may offer a small group life insurance to cover your end-of-life expenses if you pass away unexpectedly. If you have dependents, life insurance is important to protect them financially. The good news is that coverage tends to be cheaper when you're young and healthy.
Is life insurance expensive?
It depends. Term life insurance is the most affordable policy, making it accessible to most shoppers. Permanent life insurance can cost hundreds of dollars per month. It's best for those who need lifelong protection and want to include the cash value feature in their financial strategy.
Should I get life insurance if I already have it through work?
The basic group life insurance policy usually only offers one to two times your salary in coverage, which may not be enough to cover your needs. Supplement life insurance may offer additional coverage, but it still comes with limits, namely coverage limits and the inability to maintain coverage when you leave your job.
Can I get life insurance if I have health issues?
Yes. Insurance companies offer no medical exam insurance for those with health issues. Guaranteed life issue requires no medical exam or health questionnaire, while simplified issue requires no medical exam but a health questionnaire. Be aware that these policies tend to provider smaller coverage amounts at higher premiums.
Should I still consider life insurance if I'm single?
Life insurance can still be beneficial if you're single. For example, you can use it to cover debts (particularly if you co-signed or share debts with someone), pay for final expenses, keep your business in operation, or leave a legacy.
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