Q

What are the advantages and disadvantages of life insurance?

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Life insurance provides affordable financial protection to your loved ones if you pass away.

Nupur GambhirRebecca Shoenthal author photo

By

Nupur Gambhir

Nupur Gambhir

Life Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius and licensed Life, Health, and Disability agent in New York.

&

Rebecca Shoenthal

Rebecca Shoenthal

Licensed Insurance Expert

Rebecca Shoenthal is an insurance editor and licensed Life, Health, and Disability agent 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.

Updated May 25, 2021|8 min read

The main advantage of owning a life insurance policy is that if you die, your beneficiaries receive a payout called a death benefit that replaces any income you provided while you were alive. The disadvantage is that you have to pay monthly or annual premiums for this benefit. 

The pros of having life insurance outweigh the cons for most people with financial responsibilities. If you’re able to incorporate life insurance premiums into your budget, you can rest assured that your family will be financially secure if you die unexpectedly.

Key Takeaways

  • Buy coverage as early as possible because life insurance gets more expensive as you get older and your health changes

  • The advantage of having life insurance — securing financial protection for your loved ones — outweighs the major disadvantage for most people — paying premiums

  • Purchasing term life and investing the difference is the best way to reap the benefits of life insurance

Advantages of buying life insurance

Financial protection for your family

The 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. A high enough death benefit covers living expenses, such as a mortgage, and your kids’ college tuition. It can also provide a financial cushion for unforeseen expenses.

The death benefit is paid out as a tax-free lump sum, 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 purchasing 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 $20 per month in life insurance premiums for a term life insurance policy. You can lower your coverage amount and term length to get even lower premiums that fit into your budget.

Term life insurance expires by the time you have fewer expenses. If you buy life insurance coverage early enough, you could save hundreds of dollars each year compared to buying coverage later in life.

Use our life insurance calculator to get a tailored recommendation for how much coverage you need.

Peace of mind

If you don’t die while your life insurance policy is active, it may seem like all those premium payments were for nothing. But they weren’t for nothing – you were paying for protection if you did die, which can happen unexpectedly. You’re paying for the peace of mind that comes from financially protecting your family.

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 prices 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. 

You can even complete the entire life insurance application online over a couple of commercial breaks while you’re watching “The Good Place.” You just need your medical and financial records by your side. If you need help, reach out to one of our experts.

Life insurance completes your financial plan

A lot of people save for their retirement by buying an asset you can sell for a profit later; investing in an individual retirement account or a 401(k) plan; or socking 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 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. 

Cash value life insurance can help you save, too

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

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 have a high net worth and already maxed out your 401(k) or Roth IRA options. There are usually additional fees associated with whole life insurance policies.

Disadvantages of buying life insurance

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

Life insurance is most affordable if you’re young and healthy. Your premiums are determined by your medical profile, family medical history, and age, so life insurance companies will charge you more for coverage if your profile flags anything that could potentially increase your risk of dying early. And 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, according to Policygenius data. Most people earn more income as they get older than they did when they were younger, so that extra cost may not be a big financial burden — but you’ll still end up paying more the longer you wait to get coverage.

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

Term life insurance is a great deal. 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 Actuaries found a solid 45% of people cancel their whole life insurance policy within 10 years because of unaffordable premiums. 

Whole life insurance is much more expensive because it lasts your whole life; you’re guaranteed to die while it’s active as long as you’ve been paying your premiums. 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.

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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 a Roth IRA, and the fees involved in redeeming the cash – called surrendering the policy – make it less than ideal.

Unless you’ve already maxed out your other investments, 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

There are a lot of questions when it comes to 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? 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 and you could easily be sold a policy by a less-than-scrupulous life insurance agent for more coverage than you need. Do your research beforehand and work with an insurance broker like Policygenius before signing on the dotted line. Policygenius agents don’t earn commission on policies they sell to ensure you get the amount of coverage you need with an insurer that will offer you the lowest prices.

Ready to shop for life insurance?

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How to get the most advantageous life insurance coverage 

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 – you can 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 becomes active. During this time the life insurance company may investigate your application if you die and they suspect that you lied and 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 have been paying.

Buy only the coverage you need and invest the rest

With proper budgeting, you can end up getting coverage and making high retirement account contributions. That way you’re financially secure no matter what.

Most people only need term life insurance, but some 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 — standalone retirement accounts will likely yield higher returns. Talk to a financial planner to figure out the best combination of life insurance coverage and savings account contributions for your needs.

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 education costs will be covered.

FAQ

What are the advantages of life insurance?

The biggest advantage of life insurance is that it pays out a tax-free lump sum to your beneficiaries if you die. The funds ensure that your loved ones won’t be financially strained and can afford everyday expenses.

What are the disadvantages of whole life insurance?

Whole life insurance is a lot costlier than term life insurance — you’ll end up paying five to 15 times more towards premiums. Additionally, the cash value component doesn’t yield as high of a return as a traditional investment account.

What are the disadvantages of term life insurance?

The biggest disadvantages of term life insurance are that you must pay premiums to keep the policy active and your coverage expires after a set period of time.

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