Is Life Insurance Worth It? Weighing Pros and Cons (2024) (2024)

Life insurance is a contract between the policyholder and an insurance company. A policyholder makes premium payments in exchange for a policy’s financial protections. If the policy owner passes away while the policy is in force, the beneficiaries collect a death benefit, sometimes called the face value or face amount. The best life insurance companies have a range of insurance products to meet several possible personal life insurance plans and needs.

It helps to understand what kinds of life insurance options are available and how they work so you can make an informed decision. Life insurance is available through term or permanent policies.

Term Life Insurance

Term life insurance lasts for a set period of time. Policies typically are in force for 10, 20 or 30 years, but some may be as short as a few months to a year, or extend up to 40 years or more. Premiums are level, meaning they won’t change during the policy term. However, the older you are when you buy a policy, the more you’ll pay for coverage. Keep in mind that age is only one of the variables a life insurance company considers when issuing a policy.

As a rule, term policies are cheaper than permanent policies because they don’t have savings or investment components, known as cash value. They are also cheaper because coverage is guaranteed only if the insured person dies during the specified term. After the term expires, so does the coverage.

Permanent Life Insurance

Permanent life insurance provides coverage for a policyholder’s entire life, as long as premiums are maintained. Permanent life insurance policies have a cash value component, which applies a portion of the paid premiums to an investment account that grows on a tax-deferred basis. This acts as a forced savings account; you can borrow or withdraw from it under some circ*mstances. For these reasons, permanent life insurance typically has higher premiums than term life insurance.

Whole life insurance policies have fixed premiums with a cash value that grows at a specified rate. With universal life insurance, the premium and death benefit can be adjusted, allowing the policyholder some financial flexibility if their budget or needs change over time. The cash value component of universal life insurance grows at money market rates, meaning you could potentially earn more than you would with a whole life policy that grows at a fixed rate.

An indexed universal life policy cash value growth rates are linked to the performance of certain financial indexes such as the S&P 500 or others.

Variable life insurance lets you choose how the policy’s savings component is invested and may include stocks, bonds and mutual funds. The upside is the potential for greater returns than those you may see with a whole or universal policy, but if your investment choices perform poorly, the death benefit can be adversely affected.

These are a few of the more common factors to consider based on your finances, protection needs and other variables unique to your situation.

Financial Protection for Your Loved Ones

Financial protection is the primary reason most individuals buy life insurance. Life insurance provides peace of mind so your family won’t struggle financially after you pass away.

Policy Options

You have several options to create financial security for your family with life insurance. You can choose between a clearly defined term length or permanent coverage for your lifetime. Adding riders allows you to further customize your policy.

Cash Value With Permanent Life Policies

Cash value is an attractive feature of permanent life insurance policies that builds added financial reserves you can tap into in the future. Also, any cash value growth is tax-deferred, and your beneficiaries don’t need to pay taxes on the death benefit.

Cost Considerations

You’ll pay more for the privilege of permanent life insurance. Consider a term life policy or a lower death benefit amount if your finances are limited. Policies designed to last your whole life are more expensive but provide you with added benefits.

Life insurance rates also increase with age. The longer you wait to buy a policy, the higher your life insurance premiums will be. If you’re a bit older and just now considering life insurance, prepare to pay more in life insurance costs than if you had taken out a policy years ago.

Medical Exam vs. No Medical Exam Policies

The underwriting process typically takes four to six weeks with a medical exam. However, this often results in the lowest rates. No-medical exam policies are issued for those with health problems, but you’ll pay a lot more when you only must answer a few questions. Plus, you’ll have to go through a period of two years before the death benefit activates.

Life insurance is competitively priced throughout the industry, and while each insurer has its methodology to arrive at life insurance quotes, several factors are standard across the board. The premium you pay typically depends on the following factors:

• Age
• Health and medical history
• Occupation
• Gender
• Lifestyle
• Policy type
• Amount of coverage

Some states also let insurers factor in a FICO/credit-based insurance score when determining premiums.

Every situation is unique, and all providers have different pricing methodologies for term life insurance and permanent life insurance. To get the best price for a policy that most closely matches your needs, you consider working with an experienced independent life insurance agent or a financial advisor. Individual providers also often have calculators on their websites, or you can use MarketWatch’s life insurance calculator, which can also help you as you shop for a policy.

Life insurance is expensive. Sometimes it can be, but there are many options to lower the cost based on the type of policy you want and the amount of the death benefit. Term life is generally cheaper but has fewer benefits than permanent life insurance.

You must take a medical exam. Not necessarily. Most policies require an exam, but if you have a pre-existing medical condition and want to avoid too much scrutiny, policies that don’t require a medical exam are also available in lower amounts — but you’ll pay a lot more for skipping the exam, since it means you are riskier for the company to ensure.

Group life insurance through your employer is enough coverage. Probably not. Death benefit amounts through group life insurance are usually low, and there are limited policy options. Plus, if you change jobs, your coverage may not go with you.

You don’t need life insurance if you’re young. While you may have fewer reasons for coverage when you’re in your 20s or 30s, buying a policy when you’re young means you’ll get the best rates when you add other financial responsibilities later in life.

Pre-existing conditions disqualify you from life insurance coverage. Many times this is not the case. If you have heart disease, diabetes or other medical challenges, you can still find coverage through some providers. However, you’ll pay more than a similar person in good health.

Is life insurance worth it? In many cases, absolutely. At other times, your money may be better placed elsewhere. If you’re single or you have other sources of wealth to protect your family, then you may not need life insurance.

But if you’re like most people, you will have mortgage payments, college expenses or the need to protect your family from the loss of earnings if you pass away. Policies are also added protection for final expenses associated with end-of-life medical bills and funeral costs.

Take time to assess your needs and budget, and then reach out to a licensed agent or financial advisor to see how they can best protect you and your family as part of an overall financial planning process.

Methodology: Our System for Ranking Life Insurance Companies

Our team researches and ranks life insurance companies using an in-depth scoring system that considers the factors most important to consumers like you. Our analysis includes a comprehensive review of each provider we feature based on available coverage, customizability, availability, customer service and company reputation. Here are the factors we take into consideration when rating life insurance providers:

• Brand trust (40%): Life insurance payouts can exceed $100,000 or more, which makes choosing a reputable and trustworthy installer important. To assess brand trust, we use J.D. Power and Associates customer satisfaction surveys, AM Best credit rating scores and the National Association of Insurance Commissioners (NAIC) complaint index. The higher a company scores in each area, the more points it receives.
• Coverage (33%): The more policy options a life insurance company offers, the more opportunities you have to obtain the right coverage for your specific needs. For this reason, we give companies the most points for offering multiple types of life insurance, including various term, permanent and no-exam options.
• Availability and ease of use (19%): Since life insurance coverage options can be complex, we consider the ways a customer can reach a company — and how easy communication is. For this category, we research how many communication channels a company offers for general customer support, claims processing and the application process. Companies earn the most points for offering various ways to interact with an agent, both in-person and online.
• Riders (8%): Companies offering various life insurance riders or endorsem*nts allow policyholders to better customize their coverage. In this category, we determine how many riders a company offers and award the most points to providers with more than 10 options.

We use our rating system to compare and contrast each company against key factors to help us determine the best life insurance companies in the industry. To learn more, read ourfull life insurance methodologyfor reviewing and scoring providers.AM Best Disclaimer