Is Life Insurance Worth It?

According to recent studies, 46% of the American population currently do not own a life insurance policy while another 50 million feel they are underinsured.

In connection to this, it is to be noted that of all insurance types, life insurance is the one kind of coverage that people can never benefit directly from. After all, its main purpose is to protect the financial security of those you love.

The reasons why people purchase life insurance vary from person to person, but there are five essential considerations many people cite as their primary reason for having the coverage.

1. To provide financial security for the family.  In the event of a death, families often lose a major source of ongoing revenue.  A family without life insurance can find itself in immediate financial distress.  This financial turmoil will come on top of the emotional toll of the loss of a loved one and is to be avoided, if possible.
2. To pay off large debts accumulated in life.  The family home is a treasured possession and something a family invests several decades in fully acquiring.  This and other large financial obligations can be paid off in full through a life insurance policy purchased in the proper amounts.
3. To cover the costs of a child’s higher education.  Given the current cost of a college education, the total expense can be hard to cover if the family has suffered the loss of its primary (or even secondary) breadwinner.  Life insurance is often earmarked for the purpose of educating a family’s children.
4. To create a substantial inheritance for the next generation.  Even if one does not come from wealth or have a job in the seven figures, life insurance can provide a way to leave one’s children with a significant inheritance.  It can afford the opportunity for a family’s children to be able to start a business or purchase their home outright.
5. To cover the cost of funeral expenses.  A funeral is the third largest expenditure in a person’s life. An average funeral costs between $7,000 and $10,000 and is a large burden to leave on a family’s shoulders.

As with most things in life, the choice of the proper life insurance depends on desire and discipline. Essentially life insurance breaks down into three categories: term life insurance, whole life insurance, and return-of-premium.  Given your specific circumstances, one of these can serve your family well.

Term Life Insurance

This policy offers basic coverage at a relatively low rate.  For instance, it allows a young non-smoking man in his 30‘s to purchase up to a million dollars in coverage for less than $3,000 a year.

The policies are generally easy to understand and obtain.  Decide how much coverage you want and for how long and begin your search.

However, it’s important to understand that this coverage expires. 

For instance, if you’ve purchased a 30-year policy when you were in your thirties, the policy will expire when you are in your early to mid-sixties. 

If you have not found other means for providing for your family after your demise, you will be basically starting from the beginning – only you’ll be older and harder to insure.

Whole Life Insurance

Given that you keep your policy current throughout the course of your life, this policy never expires and you will be certain that you can leave behind something for your family. 

This type of insurance has a saving component that you can access in your retirement, though what you withdraw will be deducted from the policy’s total value. 

Additionally, there are significant tax benefits. This is a very complicated policy and the aid of an honest, experienced broker can be tremendously helpful.

Return of Premium

This is a hybrid of the other two types of policies.  If you pass away before the term of the policy, it pays out to your family in full.

If you outlive the length of your policy, you will get back everything that you’ve paid into it.

It is significantly cheaper than whole life insurance and approximately 50% more expensive than term life insurance.

However, if you opt-out of the policy earlier than the contractual length of time, you will lose a significant percentage of what has already been paid into the policy.