There are many benefits to life insurance, namely protecting your family or business from financial loss in the event of your death.
But there are generally questions and confusion surrounding the who, what, when, how, and why of buying a life insurance policy.
Knowing where to begin and weighing the many benefits of different options can mean the difference between getting the coverage you need and taking the risk of going without a policy.
In this article, we’ll unravel some of the biggest questions people have when considering the pros and cons of buying life insurance, and how life insurance can benefit you now and down the road.
Table of Contents
Where Should You Begin When Buying Life Insurance?
Most people realize they need life insurance at some point, but don’t know when or where to start.
In recent years, there has been a significant decline in the number of households who opt to have any life insurance protection at all.
In some cases, this decline can be attributed to workplaces dropping life insurance options for employees, although this is not always the case.
If you are lucky enough to have a workplace-offered policy, there are still a few questions you should ask yourself:
- If you have a small life insurance policy through your job, do you need something beyond that?
- Do some people benefit from additional coverage more than others?
There is also the question of where you should begin to look for life insurance if you want private coverage.
With so many agencies offering a variety of different options, it’s hard to choose where to start.
There are also a few different types of life insurance policies out there, and finding the right one for you can seem like a daunting task.
Let’s begin by talking about who needs life insurance the most, and when you should start to look at policies.
Who Benefits from Life Insurance?
Everyone who has debt or who doesn’t want to burden their families or businesses with final expenses or loss of income, can benefit from life insurance.
Almost everyone needs life insurance sooner or later, at least for a short time.
The problem is many people wait until there is a significant life event which forces them to actually take action and purchase it.
Many people today feel they can avoid purchasing insurance if they have saved or invested in other ways, but that doesn’t always work out.
Investing can be risky, where life insurance is a sure bet, every time.
Having a life insurance policy is especially important if you own a business or if there is a significant difference in the money you make versus your spouse.
Maintaining your family’s lifestyle is important as they go through the process of handling your estate and getting back on their feet.
It’s important to remember life insurance isn’t just to cover one thing; it is designed to give liquidity to your assets so your family can cover many costs associated with unexpected death, and set themselves up for future stability.
When Should You Buy a Policy?
There is a rule in the life insurance game that the younger and healthier you are, the cheaper it is to purchase insurance.
That being said, some experts argue that those who don’t have a significant amount of debt or who have no dependents may not need to purchase insurance quite yet.
But life insurance is valuable for almost every adult in one way or another, so let’s take a look at who should buy a policy right away.
You should purchase a life insurance policy now if:
- You recently bought or plan to buy a home
- You are starting a family—married or not, your children will benefit from the policy
- You have student loan debt that may fall on a parent or other cosigner in the case of your unexpected death
- You and your partner both work, and you rely heavily on both incomes
You own a business or hold a share in one
What are the Advantages & Disadvantages?
There are clear advantages to owning life insurance, but there are disadvantages, too.
Take each side into account when making a decision so you’re choosing your policy for all the right reasons, and avoiding the negative ones.
Clearly, there are lots of benefits of life insurance or it wouldn’t be such a critical purchase for most families.
Here’s a quick snapshot of the biggest advantages of life insurance:
- Covers burial costs
- Replaces income
- Covers debts
- Offers charitable giving
- Estate planning benefits
- Buys time (great for businesses)
- Provides inheritance
- Used for cash growth (and potentially tax benefits)
And the list actually goes on.
But, let’s take off the rose-colored glasses for a second to look at a few disadvantages.
Depending on your situation, there can be drawbacks to life insurance which could override the benefits listed above.
Here are the possible main disadvantages:
- Overall prices
- Sunk costs
In some instances, life insurance is very affordable, but mostly for those who are young and healthy.
If you’re older, unhealthy, or simply require a large amount of coverage, the monthly premiums for life insurance can be a bit of a steep expense.
The main object of life insurance is always to create leverage—by paying a smaller amount now you get a larger amount later—but it’s not always your best bet.
Did you know only a very small percentage of policies ever pay out?
This is because most people buy term life, and they never end up using the policy (meaning, they outlived it). While this is good because you’re still alive, it might seem like the money went down the toilet.
There are products and riders which offer this money back to you if you live longer than your policy, but they only increase your premiums.
If you opt for a permanent policy, there can be great benefits, like building up cash value tax free.
However, this often creates illiquidity, at least for a number of years, before the cash can be accessed.
If you’re planning an estate and have a life insurance policy inside of an irrevocable life insurance trust, there’s actually never access again; this is why careful planning with these types is so critical.
What are the Benefits of Each Type?
There are a few types of life insurance plans you should be aware of before making an official decision and looking for an insurer.
There are a lot of policy types to choose from, but the main types of life insurance are:
- Final expense
Term Life Insurance
Term life insurance is the most basic, and most often thought of, type of life insurance.
It is the type most often held under a group life insurance policy by your employer.
As the name implies, term life insurance is purchased for a specific length of time, whether that’s 10 years, 30 years, or even longer.
At the end of the term, many carriers will then offer a renewal.
Because of the nature of term policies, they are the most inexpensive way to purchase life insurance, and typically your premiums will remain the same throughout the policy.
Whole or Permanent Life Insurance
The main difference between whole life and term life insurance is that whole and permanent policies are meant to last for the entire lifetime of the policyholder.
Whole life insurance is a type of permanent life insurance and is by far the simplest in this category.
The premium on this policy type will remain the same throughout the life of the policy, which is budget friendly.
Having premiums stay the same throughout the years is most helpful if this type of policy is purchased when you are young and healthy—when you will get the best rate.
In some cases, pre-existing medical conditions will force you to purchase a whole life insurance policy versus a term policy because you are considered high risk.
This is something to keep in mind when shopping around.
Final Expense Life Insurance
If you’ve ever watched daytime TV and have seen commercials from companies like Globe Life (about life insurance for seniors aged 50to 85), you have a basic idea of what final expense insurance is all about.
Sometimes called burial insurance, these policies are strictly for older adults who no longer have term life insurance policies and no longer qualify for many other policy types.
Burial costs are constantly rising, and in the U.S. the average cost of final expenses is around $9,000.
Depending on your financial situation, it can be extremely beneficial to purchase this type of policy.
Final expense insurance can be purchased in term or permanent policies, and quite often the premiums are low, despite the ages of the target applicants.
Simplified (No Exam) Life Insurance
This type of coverage is best, just as the name implies, for those who don’t want a medical exam to stand in the way of policy approval, or simply want coverage faster.
If you have an existing medical condition which will make it difficult for you to be approved, this may not be the way to go.
These policies do tend to be much more costly than the other policy types listed above since the underwriters have less data to look at.
While no one wants to think about what their loved ones will do when they’re gone, it is necessary to choose the right type of coverage to ensure a stable future for your family.