What are the advantages and disadvantages of life insurance?

Life insurance can protect your loved ones financially in the event of your untimely death. But are there any disadvantages to buying life insurance?

Zack SigelRebecca Shoenthal author photo

Zack Sigel & Rebecca Shoenthal

Published August 7, 2020

KEY TAKEAWAYS

  • Life insurance provides financial security, peace of mind and is less expensive than you may think

  • It’s important to secure coverage as early as possible because life insurance gets more expensive as you get older and your health changes

  • The greatest advantage of life insurance (securing financial protection for your loved ones) outweighs the greatest disadvantage (the cost of premiums)

When you buy life insurance, you’re hoping your beneficiaries won’t ever have to use it. Life insurance coverage is the financial protection your loved ones receive in the event of your death. If you own a policy and you die (having paid your premiums on time), your beneficiaries receive a payout called a death benefit that replaces any income you provided in life.

There are advantages and disadvantages to buying coverage, but the pros outweigh the cons for most people. This article will untangle the benefits and drawbacks of life insurance.

IN THIS ARTICLE

Advantages to buying life insurance

Financial protection for your family

The most obvious advantage of life insurance is also its functional purpose. Life insurance is the exchange of a relatively small payment each month (a premium) for a very large amount of money if you die, (a death benefit). The death benefit should be high enough to cover living expenses such as a mortgage and your kids’ college tuition, and should also provide a favorable financial cushion.

This is especially advantageous the more your loved ones rely on your income for their expenses. You want to make sure they don’t suffer financially if you die, and life insurance is the cheapest way to cover them financially for the long term.

Life insurance is a tax-free lump sum of money (unlike funds your loved ones may receive from your inheritance or estate). In addition to hefty taxes, legal processes like probate can sometimes tie up the funds in your estate, so life insurance is the best way to ensure immediate protection when you die.

Life insurance is cheap enough to fit most budgets

Depending on how much coverage you need and your age when you apply, you may be paying as little as $14 per month in life insurance premiums. You can lower your coverage amount and term length to get even lower premiums that fit into your budget.

For an affordable policy, choose term life insurance, which is meant to cover you while you have the most expenses (mortgage payments, children, business partnerships, etc.) and expires by the time you have fewer ones. If you purchased life insurance coverage early enough, you could save hundreds of dollars each year compared to buying coverage later in life.

Our life insurance calculator below can give you a tailored recommendation for how much coverage you need.

Peace of mind

If you don’t die while your life insurance policy is in effect, it may seem like all those premium payments were for nothing. But they weren’t for nothing – you were paying for protection in the event that you did die, something that happens unexpectedly. You’re paying for the peace of mind that comes with knowing that you can help your family from beyond the grave in the same way you helped them while alive. You can’t put a price on that.

It’s easier than ever to apply for life insurance

Policygenius makes it easy to compare life insurance online. In just about 10 minutes, you can get free quotes from many different life insurance companies, and choose the one that fits your needs from there. The days of having to meet with an agent and hear a spiel are over.

You can even apply online. Get your documentation together and fill out the application; you can do the whole thing during over a couple commercial breaks while you’re watching “The Good Place.” If you need help, you can reach out to one of our experts.

Life insurance completes your financial plan

A lot of people save for their retirement: buy an asset you can sell for a profit later; invest in an individual retirement account or a 401(k) plan; or sock some money away in an interest-bearing savings account. You want to protect yourself financially as you age, and the best way to do that is to start saving yesterday.

Buying life insurance should be part of that financial plan. That’s because a lot of those tactics won’t bear fruit until you’re much older. If you die before then, but you have people who rely on you financially, your retirement accounts are not going to be of much use to them. In fact, policies with a cash value can be used to supplement your retirement savings, a strategy known as a life insurance retirement plan (LIRP).

Think of life insurance as a financial bridge to your retirement. If you outlive the term, then great – cash out the money you’ve been saving and enjoy your retirement. If you die before then, your loved ones won’t suffer financially.

Cash-value life insurance can help you save, too

Some types of life insurance have a cash-value component that let you save for retirement while enjoying coverage. Among the most popular is whole life insurance, which lasts your whole life. With whole life insurance, your premiums are split to pay for a death benefit and an interest-bearing savings account.

Over time, the cash-value component gradually replaces the death benefit until only the cash-value component remains; if you die while the policy is in force, your beneficiaries will receive the cash. However, if you decide you want the money while alive, you can redeem the cash just like a traditional retirement plan.

Whole life insurance with a cash-value component isn’t the best option for everyone, but it can be a great portfolio addition if you’re a high net worth individual or have already maxed out your 401(k) or Roth IRA options. There may be fees attached, but at least you had the peace of mind that comes with purchasing life insurance coverage.

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Disadvantages to buying life insurance

Life insurance can be expensive if you’re unhealthy or old

Let’s be honest: Life insurance is most affordable if you’re young and healthy. That’s because your premiums are determined by your medical profile, family medical history, and age. The sicker you are and the sicker you could potentially become both increase your risk of dying early, so in order to hedge against that risk the life insurance company will charge you more for coverage. If you’re so unhealthy that your medical bills are already a significant burden on your finances, life insurance might be helpful to your loved ones but terrible for your wallet.

All things being equal, a $500,000 life insurance policy would cost approximately $20 more per month if you got it in your 40s than if you’d gotten it in your 20s. Most people earn more income as they get older than they did when they were younger, so that extra cost may not be such a financial problem for you. And you’ll probably have more expenses anyway, so life insurance coverage will be much more necessary.

Whole life insurance is expensive no matter what age you get it

Term life insurance is a great deal. Unless you’re older or sick, you’ll probably pay less than $50 per month for coverage. But whole life insurance is much more expensive, often clocking in at hundreds of dollars per month. For the vast majority of Americans, that’s simply too much money, even if you do get coverage out of it. A study by the Society of Acturiaries found a solid 45% of people cancel their whole life insurance policy within 10 years.

Whole life insurance is so much more expensive because it lasts your whole life; you’re guaranteed to die while it’s in force as long as you’ve been paying your premiums, so unlike term insurance your risk level is not a matter of if you die but when. But most people don’t need as much life insurance after they retire, when they don’t have any dependents, their home is paid for, and they don’t have any outstanding loans. That means the extra years you spend paying whole life insurance premiums past retirement age don’t return as much bang for your buck.

The cash-value component is a weak investment vehicle

The cash-value component of whole life insurance is a great way to force yourself to save money for retirement while providing life insurance coverage in the event that you pass away. But the rate of return is lower on average than simply investing the money in an IRA, and the fees involved in redeeming the cash – called surrendering the policy – make it less than ideal.

You’ll probably come out ahead financially if you just stick to term life insurance and invest your extra cash in a traditional retirement account or increase your 401(k) contributions.

It’s easy to be misled if you’re not well informed

Luckily, Policygenius is here to help you navigate the complex world of life insurance. But if not for us, you could easily be sold a policy by a less-than-scrupulous life insurance agent for more coverage than you need.

There are a lot of rules that go into life insurance: when can you redeem the cash value? What happens if you die but the life insurance company contests the circumstances around your death? Will you pay more if you smoked a single joint at your cousin’s barbecue last summer? What if the joint was a simple cigarette? Or a vape device?Are there companies that charge less than others for the same risk factor?

There are a few things about life insurance that aren’t straightforward. Do your research before signing on the line and you could get the right amount of coverage you need for the price you can most easily afford.

How to make your life insurance coverage most advantageous

Sign up for life insurance early

You’ll save hundreds of dollars on your premiums if you sign up for life insurance when you’re younger and healthier. You’ll get the coverage you need even if you don’t need it at that very moment – save money by buying a policy in your 20s if you expect to have dependents in your 30s.

Tell the truth on your life insurance application

The life insurance contestability period is a two-year time frame after your policy goes into effect during which the life insurance company may investigate your application if you die. That may be if they suspect that you were less healthy than you let on during the application process, or if you had risky hobbies that you failed to mention.

If your insurer finds that you misrepresented yourself in an effort to get cheaper coverage, they may cancel the policy outright, reject the beneficiary’s claim to the death benefit,or pay out a reduced death benefit prorated against the premiums you should’ve been paying.

Buy only the coverage you need and invest the rest

We’ve delved into the average amount you’ll pay in term life insurance premiums. With proper budgeting, you can end up getting coverage and making high retirement account contributions. That way you’re financially secure whether you live or die.

Most people only need term life insurance, but others may find that whole life insurance is a better fit for their financial plan. Check out the rates of return on various retirement accounts and compare them to what you’d expect to get from a cash-value life insurance policy. And talk to a financial planner to figure out the best combination of life insurance coverage and savings account contributions for your needs.

The bottom line

Life insurance is one of the best investments you can make for your loved ones. It’s up there with investing in your 401(k) and having an estate plan. Hopefully, your dependents will never need to claim your life insurance, but if you die while your policy is active, you can rest easier knowing their basic expenses, mortgage payments and your children’s education costs will be covered.

The older you are and the poorer your health, the more expensive life insurance will be. But certain types of life insurance policies, like term life insurance, are more affordable than you might think.

Don’t let the assumed cost or ambiguity around shopping for life insurance prevent you from securing your family’s financial future. To mitigate the disadvantages discussed above, make sure to shop around to lock in the most competitive price.

Managing Editor

Zack Sigel

Managing Editor

Zack Sigel is a SEO managing editor at Policygenius. He covers personal finance, comprising mortgages, investing, deposit accounts, and more. His previous work included writing about film and music.

Insurance Expert

Rebecca Shoenthal

Insurance Expert

Rebecca Shoenthal is an insurance editor at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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