The main advantage of owning a life insurance policy is that if you die, your beneficiaries receive a payout called a death benefit. The biggest disadvantage is that you have to pay monthly or annual premiums for this benefit.
The advantages and disadvantages of a life insurance policy for you will depend on your personal situation, financial protection needs, and the type of life insurance policy you’re purchasing.
The pros of having life insurance outweigh the cons for most people with financial responsibilities such as mortgage payments, children, or other 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
The advantage of having life insurance — securing financial protection for your loved ones — outweighs the major disadvantage for most people — paying premiums.
Buy coverage as early as possible because life insurance gets more expensive as you get older and your health declines.
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
Life insurance is the exchange of a relatively small payment each month — called a premium — for a significant sum of money if you die while the policy is active.
The death benefit — how much money your policy is worth — can cover future living expenses for your family, like mortgage payments and your children’s college tuition. It can also provide a financial cushion for unforeseen expenses.
The death benefit is most commonly paid out as a tax-free lump sum, unlike funds your loved ones may receive from your inheritance or estate.
Purchasing life insurance is the best way to ensure immediate financial protection for your loved ones when you die. The payout doesn’t have to go through probate court like other assets might, so there’s less of a waiting period for your beneficiaries to receive the 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. Usually term life policies last between 10 and 30 years. 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
Life insurance is similar to other products, like health insurance or car insurance, in that you hope you don’t fall ill or get into a car accident, but if you do, you know you’re covered for a worst-case scenario.
Life insurance gives you peace of mind that your family will be financially protected, especially during your peak earning years.
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 a licensed agent can help you choose the one that fits your needs from there.
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5. Life insurance completes your financial plan
The goal of life insurance is to provide a financial safety net for your family in case something happens to you. Most people choose to buy a life insurance policy that will cover them until retirement.
This is because your family members — including dependents, like your children — often rely on your income to maintain their quality of life.
By the time you reach retirement, you may stop working full-time. Or you may have enough assets saved up — through real estate, for example, or an individual retirement account — that if you died, your loved ones wouldn’t struggle financially. (This is called being able to self-insure.)
By this time, any children will likely be financially independent adults, so they don’t need your financial support, either.
Life insurance is a key component to your financial plan during your peak earning years, or until you have fewer financial obligations, so your loved ones wouldn’t suffer a financial loss without you.
49% of the sandwich generation don't have life insurance
A recent Policygenius survey found that 49% of the sandwich generation (people with a parent age 65 or older who also are raising children or supporting adult children) doesn’t have life insurance to help financially support their loved ones after they die. If that’s your case, a term life insurance policy is an easy and affordable way to provide your family with a financial safety net in your absence.
6. Cash value life insurance can help you save
The cash value is a savings component included in many permanent life insurance policies. Cash value often grows at a fixed rate set by your insurer, but it depends on the type of policy you have.
Among the most popular types of cash value life insurance is whole life insurance, where a portion of your premiums pays to maintain the policy and your insurance coverage, and the rest go toward the cash value.
Whole life insurance is five to 15 times more expensive than term life. But for certain people who are already maximizing contributions to traditional retirement accounts, it can have its own benefits:
Combines life insurance with a tax-deferred cash value
Estate planning benefits since there is a permanent death benefit
Works as a forced savings vehicle
Whole life insurance with a cash value component isn’t the best option for everyone, but it can be a good addition if you have a high net worth or specific needs, like lifelong dependents.
If your primary goal is to provide a financial safety net for your family, this type of life insurance may not be the best fit for you, but speaking with a licensed agent can help you understand your options.
7. Term life insurance lets younger people lock in low rates
Alternatively, term life insurance is the best choice for most people because it’s the most affordable and comes with few tax restrictions and fees.
The benefits of a term life plan include:
The affordable cost
Pure insurance benefit, and doesn’t have a savings or investment component (investing and saving on your own typically yields higher returns)
No cancellation fees
A term life policy is meant to last until your financial responsibilities have diminished, like when your dependents are grown or you’ve paid off your mortgage.
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.
The most obvious benefit 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 older or have health conditions
Life insurance is most affordable if you’re young with minimal health conditions. Your premiums are determined by your medical profile, family medical history, and age.
Life insurance companies often charge you more for coverage if your profile includes factors that could potentially increase your risk — for instance, a chronic illness or a high-risk hobby, like skydiving.
From an age perspective, a $500,000 term 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.
Many 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 and comes with surrender fees if you can’t afford to keep it
Whole life insurance is expensive — it often costs hundreds of dollars per month. To see the full benefits of whole life insurance, you have to continue paying expensive premiums for at least five to 10 years, but often decades.
This may leave you paying expensive premiums for coverage you no longer need. 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.
For a more cost effective option, you could consider term life instead. This way, your coverage lasts only as long as you need it, and you won’t overpay in premiums.
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3. The cash value component is a weak investment vehicle
The cash value component of whole life insurance is a good 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, 401(k), or alternative investment account. Plus, it can take years — or even decades — to build enough cash value to make a loan or withdrawal.
Unless you’ve already taken advantage of other investments, it’s safer to pay lower premiums for 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? Are there companies that charge less than others for the same risk factor?
Doing your research beforehand and working with an independent broker like Policygenius can help you get the right coverage at the right price.
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How to get the best 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 have fewer health conditions.
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 there may have been misinformation on your initial application.
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.
Buy only the coverage you need and invest the rest
With proper budgeting, you can get the coverage you need and make high retirement account contributions.
Most people only need term life insurance, but some may find that whole life insurance is a better fit for their financial plan.
You can explore 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.
If you’re weighing the pros and cons of term life insurance — or other types of life insurance — speaking with a financial planner can help you figure out the best combination of policies 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.
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 costlier than term life insurance — you’ll end up paying five to 15 times more toward 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 disadvantage of term life insurance is that your coverage expires after a set period of time.
