Key takeaways
Life insurance replaces income. If you pass away, your family gets a lump sum that’s generally income tax-free.
Term life is affordable, temporary coverage for your highest-expense years. Whole life lasts your entire life and builds guaranteed cash value.
The cash value within a whole life policy grows income tax-deferred over time, and you can borrow against it to fund milestones like college tuition or retirement.
Riders let you tailor a policy — waive premiums if you become disabled, add coverage later without a new exam, or leave a gift to charity.
Coverage costs more as you age, so buying sooner generally locks in a lower rate.
Life insurance was first invented by the Romans around 100 BC to cover funeral expenses, so that families could avoid a pauper’s grave for their loved ones. These so-called burial societies were created in which members pitched into a collective fund that could be tapped into when one of the members passed away.1
Two thousand years later, their invention is still around — but now, life insurance can do far more than cover burial costs, which is why individuals and families, pre-retirees and retirees, and business owners often make it part of a broader financial plan. If you’re weighing whether to buy a life insurance policy, this guide explains the two main types of coverage — term and permanent — the benefits they can provide, and how to think about when to buy and how much coverage you may need.
There are different kinds of policies, because people may want different kinds of protection
These days, people can use life insurance in a variety of ways to help protect their families and financial wellness, so there are different kinds of policies that provide different sorts of benefits. The two main types of policies are term life insurance and whole life insurance, and both are binding contracts between you and a life insurance company — as opposed to a society of your peers.
With a term life insurance policy, you agree to pay a premium for a specified period of time, usually between 10 and 30 years. In return, the company guarantees a death benefit to your beneficiaries, typically your family. The death benefit is generally paid out in an income tax-free lump sum of cash.2,3
Once the term expires, your coverage is gone, and you either have to do without life insurance or get a new policy — and life insurance rates will generally be higher because you are older. That said, many providers — including Guardian — may let you convert a term policy to a permanent life insurance policy for part or all of the coverage period.
A whole life insurance policy provides permanent life insurance protection — it’s designed to last your entire life as long as premiums are paid. Like other permanent policies (such as universal life insurance), it includes a cash value component that grows over time on an income tax-deferred basis, so you don't pay income taxes on the gains. The cash value can be withdrawn or borrowed from during your lifetime.4,5,6 This is a benefit of whole life insurance. A term life policy has no cash value component: once the life insurance term is over, there's no value to your family. However, term rates are typically much lower than those for a permanent policy.
If you’ve been wondering, “Should I consider life insurance?” you have to decide which kind of policy will fit your needs. Ultimately, the choice comes down to your reasons for considering life insurance.
10 reasons why life insurance is important — and the benefits it can provide
1. You want protection that lasts your entire life
The most common reason for purchasing life insurance is to provide a death benefit that can help support your family if you pass away. A life insurance policy is typically the most cost-effective way to provide income replacement to your family in the event that you can’t be there to support them. Some people feel they only need that death benefit during their working years, but others want that protection to last indefinitely. If you’re in the latter camp, consider getting a permanent whole life policy that provides guaranteed lifetime protection as long as premiums are paid.
2. You want an income tax-free death benefit paid to your family
Both whole and term life will typically pay the entire life insurance death benefit free of income taxes to your beneficiaries. Life insurance — specifically whole life — can provide other tax benefits as well because the policy's cash value grows income tax-deferred over time.
3. You want cash value to help build family assets
The cash value of a whole life insurance policy can help provide a pool of funds you can access to help cover expenses for unforeseen needs, help fund college expenses to provide educational funding for dependents or a new business, or even to supplement your retirement income.
4. You want added financial protection
Whether you’re purchasing a term or whole life policy, riders can help add flexibility and provide extra financial protection and support, even while you're still alive.7 However, whole life policies generally have more available riders than term policies because they are designed to cover a lifetime of different possibilities. For example, many whole life policies offer a guaranteed insurability rider (no medical exam is required for increasing your coverage) or a disability waiver (which pays your premiums should you become unable to work).8 Be sure to ask your life insurance company or financial advisor about what riders may be available to shape your policy in a way that you prefer.
5. You want to collect dividends
Mutual life insurance companies like Guardian are owned by their policyholders and pay dividends to them based on company performance.9 While not guaranteed, dividends can increase a policy's cash value beyond the growth rate guarantee and help build your overall wealth.
6. You want to provide an inheritance
Transferring wealth or leaving an inheritance is one of the top five reasons Americans give for owning life insurance.10 But term life insurance may not be ideal for this purpose, because coverage is temporary. The income tax-free death benefit of a permanent whole life insurance policy can be a good way to help ensure that an inheritance will be provided when the time comes, and as an added benefit, life insurance proceeds bypass the probate process, which means that funds can be provided before your will has time to go through the courts.
7. You want to help fund an important cause
If part of your estate planning includes leaving money for a cause that’s important to you, you can choose to designate a charity as the beneficiary of your life insurance policy. Another option is to include a Charitable Benefit rider to your term life policy. This rider from Guardian will add an extra 1% to your standard death benefit (up to a maximum of $100,000) to be paid to the charity of your choice, over and above the amount paid to your designated beneficiaries, at no additional premium.
8. You want to help protect your business
Life insurance can do more than protect your family — you can purchase a policy that protects your business, as well. For example, if you are a sole proprietor and the continuation of your business would be jeopardized if you were to die, consider a business-focused life insurance policy to help fund operational continuity, including buy-sell agreements, one of the ways life insurance can support your employees, customers, and family members who receive the profits from your business.
9. You want to diversify your investments
Stocks and bonds may form the bulk of your investment portfolio, but it never hurts to add more diversity. The cash value of a whole life insurance policy is an asset that can provide guaranteed, income tax-advantaged growth similar to a 401(k) or IRA while providing the added assurance of a death benefit paid to your beneficiaries.
10. You want to manage estate taxes
Funds left to a beneficiary in your life insurance policy are paid out free of income taxes and not counted as part of your estate, which may help reduce tax burdens for your family. Life insurance proceeds can also help cover final expenses, including funeral and burial costs, while preserving other estate assets for heirs. However, tax laws can be complex, so be sure to seek appropriate advice from a tax professional before purchasing a policy for estate planning purposes.
Living benefits: What life insurance can do while you’re alive
Several of the reasons above have nothing to do with a death benefit. Cash value you can borrow against, dividends that can build wealth, a waiver that keeps your policy in force if you become disabled, and a rider that adds coverage later without a new exam — these are often called living benefits, and they’re a big part of why permanent life insurance can be more than a safety net. One way to think about it: term life is like renting — you pay for coverage for a set period, and when it ends, so does the coverage. Permanent life insurance is more like owning — it lasts as long as you pay the premiums, and it builds equity in the form of cash value.11
Now is a good time to consider life insurance
Only about half of American adults — 52% — have life insurance, and 38% say they either need coverage or need more than they have.12,13 Guardian’s own research shows one reason why: over half of Americans think life insurance costs three times more than it actually does.14 “Life insurance isn’t just about planning for the worst; it’s about providing financial confidence for the living,” says Andy Gordon, Head of Individual Life Insurance at Guardian.15
The good news is that it's easy to get a quote, and since most people overestimate the cost of coverage, it's probably more cost-effective than you think. In fact, a 30-year-old woman in good health can get $1,000,000 of term life insurance for under $50 a month.16 But the best reason to get life insurance now — or at least start the process — is because coverage generally gets more expensive as you age.
Guardian can help
Want to get life insurance but can’t decide between term and permanent life insurance? Guardian can connect you with a financial advisor who will listen to your needs and recommend different life insurance options to fit your needs and budget. Among Americans who rate their financial wellness highly, 61% work with a financial advisor.17
Frequently asked questions about life insurance coverage
Many factors go into deciding when to purchase life insurance. Some people choose to get a policy when they get married or start to have children. Others may get a policy later in life to help with estate planning, to provide a source of guaranteed funds to care for a child with special needs, or even for final expenses. And some people apply for a policy when they start their career just after college: they want the financial confidence that whole life cash value can provide, and they recognize that they want to consider purchasing life insurance now, because the cost is generally lower than it will be later in life. Guardian’s decade-by-decade planning guide suggests enrolling in life insurance in your 30s and reviewing your coverage limits in your 40s as your income and obligations grow.18
Building savings and buying life insurance shouldn’t be an either/or proposition: both can be important to your financial wellness. Having said that, there are situations or times in life when it makes sense to prioritize one over the other. For example, as you’re starting a family, it may make sense to prioritize getting life insurance, especially if you already have some savings built up. Conversely, later in life, after children have left the house and you’re looking forward to retirement, you may want to prioritize building your nest egg. It’s also important to note that permanent life insurance policies can serve both goals because they provide a death benefit that is payable in full from the first day the policy is in effect, and they accumulate cash value that is available to the policyholder during their lifetime as long as premiums are paid. This can be accessed to help pay for college tuition, health emergencies, medical bills, and other life events — including retirement.
There are many factors that go into answering the question of “How much life insurance do I need?” Your individual circumstances will determine how much of a death benefit you actually need. For example, if you’re the primary earner in your family, your coverage may need to replace lost income and help your family pay the mortgage, other debts, and college costs. The life insurance calculator from Guardian can help you determine the amount of coverage you may need and your life insurance cost. If you have coverage through work, it’s a good start — but employer policies typically cover one to two times your salary, while many financial professionals suggest five to 10 times your income, and workplace coverage usually ends when you leave the job.19
The core benefit is an income tax-free death benefit that helps replace your income and cover debts, a mortgage, or college costs if you pass away. Permanent policies add living benefits: cash value that grows income tax-deferred and can be borrowed against, potential dividends from a mutual company like Guardian, and riders that let you tailor the policy. Proceeds also generally bypass probate, so your beneficiaries can receive funds faster.
If anyone depends on your income — a spouse, children, aging parents, or a business — life insurance is usually one of the most cost-effective ways to protect them. Term coverage for a healthy 30-year-old can cost less than many streaming subscriptions, and rates generally rise with age, so it tends to be worth more the earlier you buy. If you have no dependents and no debts others would inherit, it may be a lower priority.
