Is life insurance worth it?
Is life insurance worth it? The answer is complex because everyone has a different financial situation. Ultimately, it's about providing security for loved ones.
Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York
Life insurance can be an important part of a solid financial plan. It can provide security to your loved ones, pay for your final expenses and cover your outstanding debts. In some cases, it provides cash value that you can use while you're still alive.
Whether life insurance is for you depends on what you need from your policy and the value you place on financial protection and peace of mind.
How does life insurance work?
Like the insurance that protects your home and your car, life insurance covers an important asset: your life. When you're gone, will your loved ones be able to keep up with expenses? Think about your mortgage payment, car payment, college tuition and child care. A life insurance death benefit helps ensure your family won't struggle to make those payments.
Most insurance policies require monthly premiums, which are based on many factors. Those factors include the size of the policy's benefit, your age and your health. The older you are and the shorter your life expectancy, the more expensive your insurance will be.
What are the benefits of life insurance?
If you're looking for a way to provide for your loved ones after your death, you'll want to consider life insurance.
Your dependents can use the death benefit to pay for your funeral expenses, settle your debts and cover living expenses. It can also replace the loss of your income, which may have been paying for your dependents' needs.
There are several types of life insurance plans, but they fall into two basic categories: term and permanent. The best combination for you depends on your needs.
Term life insurance
A term policy covers you for a set period. You pay a periodic premium, and if you die during that time, the policy will pay out to your beneficiaries. Term policies aim to be more affordable for the coverage amount and do not include a cash value component.
The payout on a term life insurance policy can help take care of your family's immediate needs after you're gone. For example, your family can use it to:
- Pay off consumer debt, like credit cards.
- Repay loan obligations, like a mortgage or auto loan.
- Make up for the loss of your income.
- Cover unexpected final expenses, like medical bills.
- Pay for child care or education expenses.
There are a few drawbacks when considering term life insurance. First, it's not a guarantee that everyone will qualify for a policy.
And while no one wants their family to have to take advantage of life insurance, you're only covered for a certain period of time with term insurance protection.
Permanent life insurance
If you're looking for lifetime coverage, you might consider permanent life insurance. While life insurance isn't an investment vehicle, permanent insurance has a component that allows policyholders to accumulate a cash value that they can draw on during their lifetime.
Permanent life insurance often is used to cover long-term expenses. For example, you could use it to:
- Replace retirement income.
- Repay long-term debt.
- Cover final expenses and funeral costs.
- Help with estate planning.
- Build tax-deferred wealth through the cash value component.
If you're concerned about holding coverage for your lifetime, especially after retirement, the cash value component is a notable feature. It can help offset premium cost or be paid back to you should you cancel the policy. You can also borrow against the cash value.
On the downside, permanent policies are generally more expensive. The rate of insurance, other fees and potential taxes all play into higher cost.
Also, if you borrowed against the cash value, it may reduce the value of the death benefit.
How can life insurance affect my financial security?
According to LIMRA's 2022 Insurance Barometer Study, more than 40% of families said they would face financial struggles within six months of the death of the primary wage earner. Roughly 10% would struggle within a week.
Life insurance is a key element in feeling financially secure, yet the same study found that one in two Americans don't have life insurance.
So why don't people have coverage? Discomfort with end-of-life discussions is a major hurdle for 40% of the survey's respondents. Because many people are uncomfortable talking about death or end-of-life issues, many households don't prepare for the loss of the primary earner.