What are the advantages and disadvantages of life insurance?

The #1 advantage of life insurance is financial protection for your loved ones if you pass away. The biggest disadvantage of life insurance is the cost, which is more affordable than you might think.

Headshot of Policygenius editor Nupur GambhirRebecca Shoenthal author photo

By

Nupur Gambhir

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

&Rebecca Shoenthal

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

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By

Maria Filindras

Maria Filindras

Financial Advisor

Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

Updated|9 min read

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The main advantage of owning a life insurance policy: If you die, your beneficiaries receive a payout called a death benefit that replaces any income you provided while you were alive. The biggest disadvantage: 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 such as mortgage payments, children, or student debt. If you’re able to incorporate life insurance premiums ($25 to $35 per month for the average 35-year-old) 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 declines.

  • 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 is the best way to reap the benefits of life insurance.

Advantages of buying life insurance

1. Financial protection for your family

When you buy a life insurance policy, a robust policy won't just cover the basics — it’ll cover your dependents’ future and standard of living, too. 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 can cover future 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 for a long time, so purchasing life insurance is the best way to ensure immediate protection when you die.

Because a life insurance benefit is a tax-free lump sum of money, your family can use the cash however they wish, including:

  • Housing costs, including paying off a mortgage or paying rent

  • Other debts, like student loans, credit cards or car payments

  • Existing or future college education costs for your children

  • Childcare

  • Replacing financial support you provided

  • Everyday costs — including food, transportation and healthcare

  • Vacation

2. 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 or thousands 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.

3. 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 — and you can’t put a price on that.

4. 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.

5. Life insurance completes your financial plan

A lot of people save for their retirement by buying an asset they 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. 

6. Cash value life insurance can help you save

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.

According to Policygenius data, whole life insurance is much more expensive than term — sometimes as much as five to 15 times the cost. But for certain people with niche financial needs, it also has its own benefits:

  • Combines life insurance with a savings-like component called the cash value.

  • The cash value component can be used as part of a complex estate planning strategy.

  • Works as a forced savings vehicle.

  • You can take out loans against the cash value portion.

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.

→ Learn more about whole life insurance

7. Term life insurance lets younger people lock in low rates

Alternatively, term life insurance is the best choice for most people because it is the most affordable. A term policy is meant to last until your debts are paid off (generally a 20- to 30-year period while people depend on you most). The benefits of a term life plan include:

  • The cheapest life insurance you can buy.

  • If you buy term life insurance when you’re in your 20s, 30s, or 40s, you can lock in low rates.

  • Term life insurance is purely an insurance product and doesn’t have a savings or investment component. This is a good thing — investing and saving on your own yields higher returns.

  • If you have a term life policy and no longer need it, you won’t lose anything more than the premiums you’ve paid.

→ Learn more about term life insurance

8. Life insurance riders let you customize your policy

You can make your life insurance coverage even more robust by adding life insurance riders. Riders are optional add-ons to a life insurance policy that provide some coverage in unique situations. Here are some rider options for you to consider when you buy life insurance:

  • Disability income rider: This provides you with a monthly stipend if you become unable to work due to a disability.

  • Waiver-of-premium rider: If you become disabled, you can keep your life insurance policy and have your payments waived until your disability ends.

  • Term conversion rider: This allows you to convert your term life insurance policy into a permanent life insurance policy.

  • Accelerated death benefit rider: If you’re diagnosed with a terminal illness, you can get all or part of the death benefit paid out before you die.

  • Long-term care rider: If you require long-term care, such as a nursing home, this rider takes money out of your death benefit to pay for the expenses.

On of the most obvious benefits of life insurance is the tax-free cash payout for your loved ones if you die. Financial protection is the most important asset life insurance provides for you and your family.

But there are other major benefits of life insurance, depending on the type of policy you buy and which additional riders you select. Your specific policy should be the most beneficial to you and your financial needs, so shop around and compare policies to see what’s best for you.

Disadvantages of buying life insurance

1. 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 includes 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 hard on 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 a big financial burden — but you’ll still end up paying more the longer you wait to get coverage.

2. 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.

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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3. 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 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.

4. 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.

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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 your 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. Not sure how to weigh the pros and cons of life insurance? A Policygenius agent can walk you through the advantages and disadvantages of life insurance to help find the right policy for you.

Frequently asked questions

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 5 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.

Authors

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

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Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

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Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

Expert reviewer

Financial Advisor

Maria Filindras

Financial Advisor

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Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

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