When living on a budget, you’re looking for expenses you can cut out. Cell phone service is one of those luxuries you would definitely notice if you got rid of it. But would anybody notice if you got rid of your life insurance? Every month you pour money into a policy and you don’t know if anyone will ever use it. Or, if you’ll get back all you’ve paid into this. Is life insurance worth it?
Depends on who’s buying.
Everyone’s situation is different and everybody’s policy is different. To determine if life insurance is worth it, you need to look at what you can afford, what you need, and the different types of policies.
If your life insurance payment is the difference between you living month to month or being able to save money for emergencies, life insurance likely isn’t right for you. You don’t want your life insurance premium to stress you out every month. Especially if the premium is stressing you out more than the idea of not having coverage.
Term life insurance is surprisingly affordable. Especially if you’re getting coverage while you’re young. 50% of people overestimate the cost of term life insurance. Check out term life insurance rates if you are looking for the most affordable options.
If your life insurance premium fits into your monthly budget nicely, then consider why you want life insurance? That way you’re sure you’re getting the right coverage to make life insurance worth it.
Are scenarios of the future keeping you up at night? Or are you just looking to make responsible choices for those who rely on you financially?
Most people will want life insurance after big events like getting married or having a baby. This is when you’re gaining dependents that rely on you financially.
If you’re the sole provider for your family then you want life insurance coverage. Consider spousal income, number of dependents, and cost of living when determining how much coverage you’ll need. The dependents relying on you will determine what type of life insurance you need.
For example, if you have a disabled child who can’t be financially independent then term life insurance won’t give you adequate coverage. In this scenario, you’ll need to have insurance to last for your entire life.
If you have dependents that will be moving on to provide for themselves, then term life insurance coverage may be the best option. Especially if you want life insurance for peace of mind more than an investment opportunity.
Different types of life insurance policies have very different premiums. When you’re able to choose term life insurance, the lower monthly payment frees up opportunities for investing the difference. This may be the best option if you don’t have a lot of cash flow available for investments.
When you look at a whole or universal life insurance policy as an investment, you can evaluate the return you’ll receive. Compare this to the money you would be investing separately if you were saving with a term policy.
Let’s say Ron is 30 years old and in good health. He has the option to purchase a 30-year term policy for $360 a year. Or he can purchase a whole life policy for $4,000 a year.
If he decides to buy the term policy he will be left with $3,640 a year that he could invest in another outlet such as stocks or bonds. Those investments could make more than the investment opportunity with the permanent policy. You would compare how cash accumulates in the policy to your predicted investment opportunities (stocks, bonds, real estate, etc.)
Each policy is different in exactly how much cash will be accumulated. With many permanent policies, you won’t know exactly how much it will accumulate because the growth rate will depend on the market conditions. Alternatively, you don’t know how much you would make with your separate investments.
There’s definitely an element of risk to both types of life insurance policies. Keep in mind that only a small amount of the premiums of a whole policy go to accumulate cash value. The rest is to pay the life insurance company as well as the death benefit. With some policies, it takes decades for the cash value of the policy to exceed the premiums you’ve paid for the policy.
Life insurance is divided into two types of policies: term and permanent. Permanent policies include two types: whole and universal life insurance. If you examine the pros and cons of each, you can see which policy fits your financial situation as well as your family situation.
Term life insurance is the most common type of life insurance. That’s because it’s the most affordable. When someone first purchases life insurance, they’re likely young and without a lot of cash saved up. Term life insurance is very affordable when you are young and healthy.
1 – Term life insurance is much less expensive than permanent policies. Premiums for permanent policies may surprise you after looking at term policies.
2 – You can pay for coverage only as long as you have dependents at home relying on your income. You can get a 10, 20, or 30-year term policy based on your individual needs.
3 – You can purchase a policy that allows you to convert to a permanent policy down the line if you choose. A conversion will increase your premiums but having this option can give you peace of mind if something changes with your situation. Just make sure the term policy you originally purchase allows for such a conversion.
There is no investment component to term life insurance. This means the money you pay in premiums each month will all go to the death benefit and your policy won’t accumulate any cash value.
However, you may have the option of purchasing a return of premium term policy. This is where you will pay a fixed premium each month for a set term. However, you’ll receive your money back at the end of the term.
Of course, your premiums will be much higher with a return of premium policy. If you can afford the higher premiums you may see this type of policy as a way to force yourself to set aside money for savings.
A permanent policy accumulates cash value as you pay your premiums. How this happens is different in universal policies and whole policies. See this article for more information on the difference between whole and universal policies.
Both types of permanent policies have similar pros and cons to consider.
1 – As long as you continue to pay your premiums, you’ll have coverage for your entire life.
2 – Permanent policies allow you to invest and accumulate cash with tax-deferred growth. Tax-deferred growth means you won’t pay taxes on interest, dividends, or capital gains until you withdraw from the account. This is similar to 401K accounts. If you’re already maxing out your 401K then this is an alternative option for saving.
3 – You can borrow money from the cash value of your policy. If you need money to pay for your child’s college or another expense, you can take money out fairly easily. With a 401K account you often have a penalty for taking money out early.
4 – You can add riders to your policy including an accelerated death benefit that allows you to use your death benefit while you’re still alive.
Permanent life insurance is unaffordable for many families. These premiums are no small expense.
Also, keep in mind the flexibility you get with a permanent policy can leave less for your beneficiaries. Any loans against the policy need to be paid back and if you choose to use the death benefit early, your beneficiaries are left with less.
Most people don’t realize that many life insurance policies can be sold for a lump sum of cash. When deciding, is life insurance worth it? You should be aware of your options.
Investors will buy life insurance policies in life settlements. They’ll then take over the premium payments and receive the death benefit when the insured dies. You are left without a life insurance policy but with a lump sum of cash to use to fund medical treatments or retirement.
Permanent policies can be sold as a life settlement. But keep in mind many term policies can be converted and then sold. You can find out if your life insurance policy is eligible for a life settlement with our calculator.
A life insurance policy is all about your family. Make sure you have the necessary conversation with your family before making any decisions about life insurance. Is life insurance worth it? If you have a family relying on you, then it likely is. The type of policy that is worth the cost will depend on your financial goals. So, learn about all your options and make the best decision based on your individual family.
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