Is life insurance worth it?
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Is it worth the cost and effort needed to buy life insurance? It's a good question, and one that you should consider before purchasing a policy. For some people, life insurance is an essential source of financial protection for their loved ones, and it may be worth every penny. For others, life insurance is an added vehicle that helps them reach financial goals — an important but somewhat discretionary purchase. For still others, life insurance is simply not necessary and not worth the cost.
As the Guardian Life Insurance Company, we believe in the value of life insurance. But the purpose of this article is to help you decide whether it has value for you. To that end, we’ll discuss:
Who should consider life insurance, and why
Is life insurance worth the money
What type of life insurance to consider and what you might pay
What happens if you pass away without life insurance
When is life insurance worth it?
Put simply, insurance is designed to help manage risk and protect us in case of unexpected events. Anyone who owns a car needs auto insurance because it’s illegal to drive without it. Most people would agree that everyone needs health insurance because, without it, one is at risk of financial consequences in the event of a serious illness. And few homeowners would feel comfortable living without home insurance, even if it wasn't mandated by their mortgage company.
A life insurance policy is a little bit different. You can live without it. So, the question really is — should you? The answer depends on your individual circumstance and needs. Generally speaking, financial professionals suggest life insurance coverage for:
People with dependents: Life insurance may be crucial for individuals with children, family members, or other dependents who rely on their income. Life insurance helps ensure that in the event of the policyholder's death, their survivors are financially protected and can maintain their standard of living. The life insurance death benefit — usually an income tax-free, lump sum payment — can help cover a range of expenses, from food and other daily living costs to mortgage payments and college tuition.1
People seeking financial versatility: A permanent life insurance policy's cash value component can be used to help achieve a range of financial goals. Cash value accumulated in a permanent policy is available to the policyholder during their lifetime, and can be accessed to help pay college tuition, health emergencies, and other life events – including retirement.2,3
Those with estate planning needs: Life insurance can be a valuable tool for estate planning purposes. For example, it can help simplify the process of leaving a financial legacy for one's heirs, or it can be used to help pay estate taxes and other expenses associated with the transfer of assets.
Those with debts or financial obligations: If you have significant financial obligations, such as a mortgage or car loan, life insurance can help ensure that your survivors are not burdened with those obligations if you pass away.
Business owners: Life insurance can help protect a business and ensure its continuity in the event of the owner's death. The life insurance death benefit can be used to cover business debts, facilitate smooth ownership transitions, and keep a business running.
When is life insurance not worth it?
While there are many people for whom life insurance will undoubtedly be "worth it," there are also those for whom it may not be worth the expense:
People with no dependents: If you don't have any dependents relying on you for financial support — and your death won't cause financial hardship for others — you may not need life insurance protection.
People who can cover all expenses and debts: Individuals without dependents and enough assets to cover funeral expenses and outstanding debts in the event of their death may not need a policy.
Those with substantial assets: If you have dependents who rely on you for support but have enough savings and investments to support them in the event of your death, life insurance may not be a priority.
Those with self-sufficient dependents: When children or other dependents have their own income sources or are financially independent, the need for life insurance may be reduced.
The elderly: The cost of life insurance increases with age, and by the time one is well into their senior years, the cost of a new policy may be prohibitive.
People with low income and few assets: Although many types of life insurance can be cost-effective, individuals with minimal resources may not be in a position to purchase a policy and may have to wait until their financial situation improves.
If you are still unsure whether life insurance will be worth it, consider consulting a financial or insurance professional for guidance. They will be able to provide more details and help you to make the right decision.
If you need life insurance, what type is right for your needs?
If coverage seems like a good idea, you should familiarize yourself with the most common types of life insurance policies. The more you know, the better prepared you’ll be to make the right decision for you. Life insurance companies offer two basic types of policies — term life insurance and permanent life insurance.
Term life insurance
Term life insurance provides financial protection for a specified period, usually ranging from 10 to 30 years. It offers a straightforward and cost-effective option for individuals who want temporary coverage to protect their loved ones in the event of their premature death. A term life insurance policy provides a death benefit payout to your beneficiaries if you pass away during the term. But once the term is over, the coverage ends.
Term life insurance is typically appropriate for those who want cost-effective protection for a specific period of time. For instance, parents of young children may purchase a 20-year term policy to protect their children until they can support themselves. Or a working spouse may purchase a 30-year term policy to protect a non-working spouse until the couple has paid off their mortgage.
It's important to note that term life insurance premiums are typically less expensive than permanent policies. In fact, term life coverage may be less costly than you think: A 30-year-old male who doesn't smoke can get a 20-year term life policy from Guardian with $2,000,000 of coverage for just $122 a month. Guardian can provide an instant online life insurance quote if you're wondering what you might pay for similar coverage.*
Permanent life insurance
Permanent life insurance also known as whole life insurance or universal life insurance — generally costs more than term life insurance but can provide coverage that lasts your entire life.4 With a permanent policy, your beneficiaries will collect a death benefit regardless of whether you pass away at 50 or 100. The other main difference is that permanent life insurance provides an additional cash value component: a portion of your premium payments go into a cash account where funds can grow tax-deferred over time. After it grows a bit, you can access the accumulated cash value for use while you are still alive.
Permanent life insurance is typically appropriate for those who are willing to pay more for a policy that remains in force until they pass away – rather than for a limited period – and also offers a tax-efficient way to save money. Many people use permanent life insurance to supplement other investments and retirement savings vehicles.
What happens if you die without life insurance?
If you unexpectedly pass away without having an active life insurance policy, your family — and anyone who depends on your support — will have to overcome some financial challenges at a time when they are also dealing with an emotional loss. And while each family’s circumstances are unique, generally speaking, your survivors will need to come up with funds to cover two main areas:
Paying for end-of-life expenses: Your family may be liable for medical bills, funeral expenses, and other expenses that can quickly add up. The average cost for a funeral alone in the United States is more than $8,000, and total end-of-life costs average more than $22,500.5
Replacing your income: Lost income replacement is a far greater challenge for most families. If you work and contribute to your household's finances (even if you're not the primary breadwinner), your household will need to find other ways to replace your lost income – and likely, for many years into the future.
The path forward for those who pass away without life insurance varies depending on their household’s financial standing and savings. Those with a large emergency fund, no debts, fully funded retirement accounts, and significant cash savings (or assets that can be liquidated), will be less likely to feel financial pressures. Others will be more likely to experience financial stress.
What are the pros and cons?
Like any financial product, life insurance has both advantages and disadvantages that are important to consider. Here's a brief overview.
Advantages of life insurance | Disadvantages of life insurance |
|---|---|
Financial confidence for your dependents: The life insurance death benefit is paid out free of income taxes when the policyholder passes away, and those funds can be used to pay for funeral expenses, family living expenses, and more. | Monthly cost: Premiums can add monthly expenses to your budget, potentially making it harder to reach other financial goals or balance your budget. |
Confidence: Having adequate life insurance coverage can give both you and your dependents the confidence of knowing that many expenses could be covered by insurance payouts should you pass away. | Complexity: Some policies can be complex and challenging to understand — it's important to read the contract terms and work with a helpful agent to find the right policy for your needs. |
Versatility for estate planning: The estate planning process is complex, but life insurance policies can be another tool in your arsenal to develop a tax-efficient estate plan for your heirs. | Potential for policy lapse: If you fall behind on payments, your policy can lapse, leaving you without coverage. |
Predictable costs: Life insurance premiums for many policies are fixed, giving the policyholder predictable costs over the policy's lifetime. With that said, costs are based on your age at the time of the policy start date, and costs will be lower the younger you are when you take out a policy. | Potential to outlive the policy (with term life): Unlike whole life insurance, term life only covers you for a certain period of time (like 20 years). If you outlive that term, the policy expires, and your beneficiaries receive no benefits. These policies also do not accumulate cash value. |
Tax-efficient asset building: With permanent whole (and universal) life insurance, you can also build cash value in the policy. This can supplement other investments and provide another way to defer taxes while building long-term wealth. | Opportunity cost: The monthly premiums for life insurance have an "opportunity cost," meaning that you can't spend or invest that money in other ways. For example, the cost of premiums might detract from your ability to contribute to your retirement account. |
Common misconceptions and mistakes with life insurance
Life insurance can be worth it for many people in a variety of circumstances. Still, there are many misconceptions about life insurance policies. Here are some common mistakes people make.
Thinking that you’re too young to need life insurance: Life insurance premiums are largely based on the person's age at the time they apply for coverage. Young adults have the lowest premiums and can lock in relatively low premiums for life by opting for whole-life coverage. In one survey, 4 out of 10 insured consumers wish they had purchased policies at a younger age.
Thinking that life insurance is prohibitively expensive: Term life can be as little as a few hundred dollars per year: while whole life costs significantly more, it also builds cash value that can be accessed in a variety of ways. Plus, policies are generally customizable, with options available at various price points.
Opting for term life over whole life to save money: While it’s true that term life insurance is significantly cheaper than whole life, it’s important to consider the benefits of both. Whole life protects you for your entire lifespan, and can also accumulate cash value.
Assuming workplace coverage is sufficient: Many companies offer life insurance to their employees. However, coverage is often relatively low, with over half of employers offering coverage of only 1x annual salary or less. Often, the life insurance payout policy coverage provided through employers is insufficient.
Are there alternatives to life insurance?
While life insurance is an efficient way to help ensure financial confidence for your dependents in the event of your death, other strategies and products can serve similar purposes:
Savings and investments: Building a substantial savings account or investment portfolio can help reduce or even eliminate the need for a substantial life insurance payout.
A substantial emergency fund: While it doesn't provide long-term income replacement, an emergency fund that covers at least 3-6 months' living expenses can give your loved some time to grieve and get back on their feet.
Annuities: Annuities are insurance products that provide a steady income stream over a specified period and can provide long-term financial stability for your dependents.6
If you're considering alternatives to buying life insurance, carefully consider what your dependents might need in the event of your death. And think about speaking to a financial professional who can help you make an informed decision.
Term Life Insurance vs. Permanent Life Insurance: Cost for $500,000 Coverage
The actual cost of the policies available to you plays an important role in deciding whether life insurance is worth it. If you’re wondering how much life insurance costs, here's an overview of different policy types purchased at different ages. Remember that life insurance premiums will also vary depending on the coverage amount, your health, lifestyle, and even the insurance company you purchase from.
Average annual rates for women
Age at purchase | 20-year term life | Whole life |
|---|---|---|
20 | $177 | $3,173 |
30 | $186 | $4,407 |
40 | $282 | $6,512 |
50 | $641 | $9,002 |
60 | $1,656 | $14,375 |
70 | $7,943 | $25,510 |
Source: Covr Financial Technologies, as published in NerdWallet. Lowest three rates for each age averaged. Average price data is valid as of June 17, 2024. Based on $500,000 in coverage.
Average annual rates for men
Age at purchase | 20-year term life | Whole life |
|---|---|---|
20 | $216 | $3,593 |
30 | $221 | $4,940 |
40 | $334 | $7,440 |
50 | $817 | $10,353 |
60 | $2,352 | $16,698 |
70 | $9,436 | $29,632 |
Source: Covr Financial Technologies, as published in NerdWallet. Lowest three rates for each age averaged. Average price data valid as of June 17, 2024. Based on $500,000 in coverage.
How Guardian can help
Now that you know a little more about life insurance, you may have more questions, such as whether term or whole life is best for your needs. Speaking with an experienced professional who will take the time to learn about your unique situation is a great next step. If you don't already know such a person, ask your friends for a recommendation — or contact Guardian to find a Financial Professional who can help.