What Is the Point of Life Insurance?
- What is the point of life insurance? Learn the benefits of different types of coverage, plus explore factors to consider before you decide to purchase a plan.
If you’ve expanded your family, taken on a mortgage or hit a milestone birthday, you’ve probably considered life insurance. When you’re thinking about purchasing this type of policy, you may be prompted to ask: What is the point of life insurance? In this article, we’ll explore the answer to that question to help potential policyholders make an informed decision about buying a plan.
What Is Life Insurance and Why Do I Need It?
Life insurance is a type of insurance coverage that pays a death benefit to a beneficiary or beneficiaries if the insured individual passes away during the lifetime of the policy. These recipients are designated by the policyholder at the time the plan is purchased, although named individuals may be changed in writing at a later point. Depending on the type of policy and the amount of the benefit, the payout may be used to cover funeral and burial costs, pay off outstanding debts or cover day-to-day living expenses for beneficiaries.
Why you may need life insurance depends on your unique financial and personal circumstances. Many individuals purchase life insurance to protect their family’s financial well-being in case they die unexpectedly or prematurely. Others purchase life insurance to cover a specific debt such as a mortgage or business loan. In certain instances, the purchase of a life insurance policy may be required by a lender as a condition of loan approval.
What Is the Point of Life Insurance?
If you’re the primary breadwinner of your family, the main point of life insurance is likely protecting your loved ones’ financial well-being after your death. Purchasing a policy can bring the peace of mind that comes with knowing your family will be able to maintain their lifestyle if something should happen to you. This is especially true for households with young children or those that have taken on substantial debt, such as a mortgage.
Depending on the type of policy, life insurance may benefit you and your beneficiaries in the following ways:
- Providing cash: In addition to covering funeral and burial costs, the death benefit of a life insurance policy may be used by beneficiaries to pay off mortgages, business or automobile loans or other outstanding debts. It can also fund college tuition or provide financial assistance for raising minor children or caring for adult dependents. Plus, the death benefit payout of a life insurance policy is tax-free so beneficiaries aren't required to declare it as income.
- Borrowing power: If you purchase a permanent plan, you may be able to borrow against any accumulated cash value. This can help policyholders secure a down payment for a house or money for college tuition.
- Accelerated benefits: Some policies let you access a percentage of your benefits before you die, providing you meet certain conditions. That can include being diagnosed with critical or chronic diseases, as defined in your policy. Depending on the policy and any relevant riders, you may also be able to access funds to help pay for long-term care.
- Savings: If you’ve invested in a universal life insurance policy, your plan may include a savings component in addition to the death benefit. As money accrues, a fraction of it may be used for retirement and other later-in-life expenses.
Is It Worth It to Get Life Insurance?
Life insurance can bring peace of mind for the policyholder, but it comes at a cost. Whether coverage is worth investing in depends on your financial outlook, your budget and what you need from a policy. Here are several factors to consider before you purchase a life insurance policy:
Types of Policies
Life insurance plans vary widely, so the type of policy you choose may determine whether the investment is worth it. Types of life insurance policies include:
- Permanent life insurance: Permanent policies don’t expire. When you purchase permanent life insurance, you’re assured a death benefit payout upon your passing. Some permanent plans also include a savings component so you can access a portion of the policy’s cash value before you die. Permanent policies may be ideal for consumers who are the sole breadwinners in their family and want to provide for their family after their death. The downside to permanent policies is their high cost.
- Term life insurance: Term life insurance policies are purchased for a set period of time, after which the coverage expires. Coverage typically ranges from 10 to 30 years in five-year increments. Term plans may be ideal for individuals who have minor children or outstanding loans that will need to be paid off by family members if they die. It's important to note that, although term coverage is less expensive than a permanent policy, once it expires, it no longer has any value.
Within these two categories, options are available to suit a variety of needs. Riders may also be added to most policies at the time of purchase, offering policyholders additional benefits and coverage.
Your Risk Profile
In part, your risk profile determines how much you’ll pay for coverage, which can be a deciding factor for whether life insurance fits in your budget. Your risk profile typically includes, but is not limited to, the following elements:
- Overall health
- Family medical history
- High-risk hobbies
- History of risky behaviors such as smoking or alcohol or substance abuse
As part of the underwriting process, the insurance carrier may also order a medical exam, which may be performed by a company-approved physician. The results factor into your risk profile.
Individual Financial Needs
Your individual financial needs and those of your family can determine whether life insurance is worth investing in. If you’re thinking about purchasing a policy, it may be helpful to consider the following factors:
- Your current and anticipated future income
- How much you have in savings
- The amount and timeframe of outstanding debts
- The ages and needs of minor children
- The life expectancy of your spouse
- The needs of adult dependents, such as grown children with disabilities
- Anticipated burial and funeral costs
Why Should I Consult a Professional?
If you aren't sure whether life insurance is the right investment for you, an insurance agent or estate planner can help you weigh your individual needs and budgetary requirements. A reputable industry professional can assist you in selecting a policy that fits your needs and your budget and can educate you about riders that may be added on to provide additional coverage where you need it most. By consulting a professional, you can benefit from their extensive industry knowledge, saving yourself time and providing additional peace of mind.