Is life insurance worth it? | The Ascent – The Motley Fool

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Life insurance is a financial safety net that pays out an agreed-upon sum to beneficiaries upon the policyholder's death. Is life insurance worth it? It can provide peace of mind for family members dependent upon a worker's income, but it's not something everyone needs. Here's a closer look at the pros and cons of life insurance and who should consider buying a policy from an insurance company.
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Here's a look at some of the benefits and drawbacks of buying life insurance:
Some of the key benefits of having life insurance are:
A life insurance benefit can help the policyholder's family pay off debts, cover funeral expenses, and pay their bills following the policyholder's death. This is the primary reason most people purchase life insurance.
Permanent life insurance has a cash-value component that offers tax-deferred savings. A portion of the policyholder's premium goes into an account where it earns interest over time, but the policyholder doesn't pay any taxes on this interest until they withdraw the funds. This makes it similar to a tax-deferred retirement account. But unlike retirement accounts, life insurance doesn't penalize policyholders for withdrawing funds under a certain age.
Permanent life insurance enables policyholders to borrow against their cash value to cover expenses while they're still alive. This can be a nice alternative to a traditional loan, though it lowers the death benefit available to beneficiaries.
Some of the drawbacks of life insurance coverage include:
Not all life insurance is expensive, but certain policies can be. Older adults usually pay more for coverage than younger adults. Smokers and people with health issues pay more than healthy individuals. Permanent life insurance policies also cost quite a bit more than term life insurance.
Shopping around and comparing life insurance policies can help save money. So can adjusting the policy limits.
Life insurance is more complicated than home or auto insurance, and those who aren't familiar with it may purchase a policy that doesn't suit them. One of the most common life insurance mistakes is not understanding what is and isn't covered. This leads some policyholders to overpay for things they don't need — or worse, go without key protections.
There are several types of life insurance, but the two most common are term and permanent life insurance.
Term life insurance is the most popular type of life insurance, and it's a great fit for those who want to ensure their dependents are taken care of after their death. It's also the most affordable type of life insurance, especially for younger adults. The policy only lasts a certain number of years. After that, the policyholder can either drop the coverage or convert it to a permanent life insurance policy.
It's not a great fit for those who don't have any dependents. And people interested in the cash value component of life insurance also won't want a term life policy. That's only available with permanent life insurance.
Permanent life insurance covers the policyholder for their entire life. The cash value portion is a nice option for those who want to save for the future in a tax-advantaged way. Plus, the policyholder can use it if need be to help them cover their end-of-life expenses or pay other bills.
However, this type of policy isn't a great fit for those on a budget. And it's not always the best choice for long-term savings either. Most people are better off stashing their money in tax-deferred retirement accounts where they can earn more interest.
There are other types of life insurance as well, including final expense insurance. These policies are geared at covering end-of-life costs for older adults. They usually have a low death benefit, but it's easier to get approved for them. This can be helpful for funeral costs, but it's not going to be enough to support the policyholder's family long term.
Before purchasing any type of life insurance policy, it's important to understand the benefits and drawbacks associated with it. Read the fine print and ask questions whenever something isn't clear.
Ultimately, it's up to each person to decide whether life insurance is a good fit for them. But here are some basic guidelines about who should and shouldn't get life insurance.
Life insurance makes sense for those who have dependents. This includes adults with young children, spouses who bring in most of the family's income, and adult children who take care of their dependent parents.
If the primary breadwinner dies, these dependents could find themselves unable to afford their basic necessities. Life insurance can help them pay for these expenses even after the policyholder is gone.
On the other hand, those who don't have any dependents probably don't have much to gain by purchasing life insurance. If they're trying to prepare themselves for an emergency, they can always stash money in an emergency fund instead or invest it for the future.
Life insurance can be a good or a bad investment depending on who's asking. It really comes down to whether the person has any dependents and whether they can afford to purchase a policy.
Those who decide it is a smart choice for them shouldn't wait to buy life insurance. Doing so can drive up the cost. Plus, if the person dies before they purchase a policy, their family will be left to fend for themselves.
Life insurance could be worth it for single people if they have small children or other dependents that rely upon their income. But single adults without dependents probably don't need life insurance.
It's up to each person to decide if their savings is adequate to provide for their family members after they're gone. But adding life insurance is usually a good idea. It's possible to purchase $100,000 of coverage or more for a few dollars per month. Most people don't have access to that amount of money.
Life insurance probably doesn't make sense for those who don't have dependents.
Life insurance is usually a wise investment for those who financially support others. But it may not make sense for people who don't have dependents.
Kailey Hagen has been writing about small businesses and finance for almost 10 years, with her work appearing on USA Today, CNN Money, Fox Business, and MSN Money. She specializes in personal and business bank accounts and software for small to medium-size businesses. She lives on what’s almost a farm in northern Wisconsin with her husband and three dogs.
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