Purchasing life insurance is a big decision and is not to be taken lightly. If you’re considering life insurance to protect your family if you die or as a savings vehicle for retirement, it’s essential to compare your options. As you do your research, you should consider the benefits of life insurance and investigate any disadvantages of each life insurance policy you explore. In this article, we’ve broken down some of the best things about life insurance, as well as what you should look out for when deciding which policy is best for you.
Benefits of Life Insurance
Life insurance is often the foundation of a financial plan. Depending on the type of policy, the benefits of life insurance can last long after someone dies. Here are a few of the many benefits of having life insurance.
Family Protection
The most popular benefit of having life insurance is the death benefit. If someone dies while they have a life insurance policy in effect, the insurance company will pay a death benefit to the insured’s beneficiary. A policyholder typically decides how much insurance they need when applying for a policy. This amount of coverage can differ from person to person. However, individuals usually select amounts based on what they want to leave behind and cover a set amount of income to support their dependents.
Budget Friendly (Usually)
There are many life insurance types, and each type is designed to fit a different set of needs. Term life insurance only covers a person for a set amount of time, typically five years or more. Due to the lack of permanence, term life insurance policies tend to be the least expensive option on the market. If you want your life insurance to last your whole life or want to have flexibility in your premium payment cost, the cost of a policy will increase.
Additionally, some companies will charge more for similar policies, so you might want to shop around to see if you can get the best price.
But overall, no matter what your budget is, there is generally a policy to fit your needs.
Peace of Mind
It can be challenging to accrue wealth, especially when you’re young. You may want to protect your family financially in case you die unexpectedly, and your income disappears. Life insurance offers people peace of mind that their families will be financially stable, even if they’re no longer around to support their financial needs.
Tax Benefits
Usually, death benefits from employer-sponsored life insurance plans or private life insurance policies are tax-free. Additionally, the cash value in a whole life insurance accumulates tax-deferred growth. This means that a person can reinvest the money in the cash value of a life insurance policy without facing tax implications. The policyholder will not pay capital gains on any dividends or growth on the cash value.
But there are a few situations where life insurance may have some tax implications. You may want to speak to a financial advisor to understand the tax implication of your policy.
Financial Planning
As part of a robust financial plan, some use life insurance to cover financial expenses such as medical bills, debt or funeral costs. By using life insurance in this way, your family can avoid spending your savings that were intended for other uses.
Additionally, the cash value component of permanent life can help you save for retirement. Depending on the type of policy you have, the cash value can grow tax-deferred and be reinvested. Some policies also prevent the cash value from declining with the market if there is a downturn. Additionally, people can choose to use the cash value during their lifetimes, making it a crucial part of some people’s retirement plans.
Disadvantages of Life Insurance
While life insurance is generally an investment worth considering, you should consider the drawbacks before choosing to purchase a policy.
Sales Commissions
It is not advised to purchase a life insurance policy on your own. However, this leaves consumers open to insurance agents that might not have your best interests in mind. They may lead you toward a more comprehensive policy that you do not need or make recommendations that ensure they receive a larger commission. Therefore, be sure to do plenty of research before applying for a life insurance policy and not sign anything that you are not comfortable with.
Expense (Depending on Your Health, Age)
The cost of life insurance increases as people age, and people in poor health often find it challenging to get a reasonable rate or qualify at all. Therefore, it is good to purchase life insurance when you’re young and healthy, since these factors determine the cost of your policy.
If you are trying to get the best rates on a life insurance policy, you may want to improve your health. The life insurance medical exam will evaluate a person’s smoking status, blood pressure and more. People trying to get a favorable rate on their life insurance may want to quit smoking and improve their fitness before applying for life insurance.
Weak Investment Returns
The cash value portion of a life insurance policy is generally a safe investment vehicle. However, it may not see the same rate of return that an IRA or other investment might provide. Compared to stocks, for example, the investment portion of cash value life insurance makes pretty paltry returns. Could you make more if you invested the money elsewhere? Likely yes — unless you are an extremely conservative investor. Therefore, most people choose to fully fund their 401(k), Roth IRA and other assets before funding the cash value in their life insurance policies.
Permanent Life Insurance Costly
As mentioned before, there is a life insurance option for almost any budget. Term life insurance is typically the least expensive, but permanent insurance, or whole life insurance, is costly no matter a person’s age or health. It is pricier because it lasts a person’s entire life. Therefore, there is a payout guarantee no matter when you pass away, unlike term insurance. Term insurance is less expensive because the goal is not to die while covered by the policy.
The Takeaway
In general, the benefits of buying life insurance outweigh the disadvantages. Life insurance can help protect your family in case of an early demise and is a steady savings vehicle for retirement. However, there are various policies available, and not every policy fits everyone’s unique financial situation. That is why it is essential to understand your options and work with a financial advisor that you trust to find a suitable policy.
Insurance Planning Tips
- The life insurance insurance policy you select will have a lasting impact on your overall finances, especially once you reach retirement. If you’re unsure which policy is right for you, a financial advisor may be able to help. Finding one doesn’t have to be hard. SmartAsset’s free matching tool can make easy, as it pairs you within minutes with as many as three local advisors depending on your needs. If you’re ready, get started now.
- Looking for a quick way to see how much life insurance you need to buy? Use SmartAsset’s free insurance tool.
Photo credit: ©iStock.com/bluegame, ©iStock.com/AlexLMX, ©iStock.com/scyther5