Cost & Coverage
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Life insurance can protect your loved ones from the prospect of financial ruin in the event of your untimely demise. But are there any disadvantages to buying life insurance?
When you buy life insurance, you’re hoping you 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 do own a policy and you die (having paid your premiums on time), your beneficiaries receive a payout called a death benefit that’ll replace any income you provided in life.
There are advantages and disadvantages to buying coverage, and this article will help untangle them.
The most obvious advantage of life insurance is also its functional purpose. Life insurance is essentially the exchange of a relatively small payment each month for a very large amount of money if you die. The death benefit should be so high as to cover living expenses such as a mortgage, your kids’ college tuition, and provide a favorable financial cushion, and you can get all that covered for the cost of about six lattes a month.
This is especially advantageous the more your loved ones rely on your income for their expenses. You want to make sure they don’t have to suffer financially if you die, and life insurance is the cheapest way to do that.
Depending on how much coverage you need, you may be paying as little as $30 per month in life insurance premiums. If you don’t have a lot of dependents or your beneficiaries won’t need that much financial protection if you die, then you can easily benefit from less coverage and even lower premiums.
That’s especially true for term life insurance, which is meant to cover you while you have the most expenses (mortgage payments, children, business partnerships, etc.) and to expire when you have fewer ones. During that time, if you purchased life insurance coverage early enough, you could save hundreds of dollars each year compared to buying coverage later in life.
In that sense, you pay only for what coverage you and your family require. Our life insurance calculator can give you a tailored recommendation for how much coverage you need.
If you don’t die while the 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 die, something which could happen even this very second if you have a family history of brain aneurysms or live in a war zone. 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.
Policygenius makes it easy to compare life insurance online. In just about 10 minutes, you can get free quotes from many different life insurance carriers, 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.
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; sock some money in away in an interest-bearing savings account. You want to protect yourself financially when you reach old 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.
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, at least your loved ones won’t suffer.
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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. There may be fees attached, but at least you had the peace of mind that comes with purchasing life insurance coverage.
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. 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. Of course, 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.
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 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 effect 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 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 become deceased. 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.
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?
We have the answers here, but 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.
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.
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 the carrier 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.
We’ve delved into the average amount you’ll pay in term life insurance premiums on our learn center. 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.
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Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
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