Is Life Insurance Worth It?

Life insurance is an important part of planning for your future, growing, and protecting your wealth. Despite its significance, many people question if it’s really worth it. Although life insurance may seem like an unnecessary expense, having the proper coverage in the case of disaster is widely considered best practice. To help you make a decision, we’ve put together this guide so that you can adequately plan for your long-term finances. 

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Who Needs Life Insurance?

Here’s the short answer: almost everyone needs life insurance. The slightly longer answer is that people who have dependents especially need life insurance. Life insurance is essentially a financial tool that provides a lump sum cash payment (called a death benefit) to specified beneficiaries when the insured passes away. With responsibilities like mortgages, general debt, or future expenses such as tuition, medical bills, and end-of-life expenses, most people don’t want to suddenly manage thousands of dollars worth of extra expenses if a family member dies unexpectedly.

People who need life insurance

• If you have dependents, you need life insurance. People who depend on you financially can benefit from a life insurance plan which provides financial security for them and can help with expenses you want to make sure are covered if you kick the bucket early. 
• If you have financial obligations that will fall to others if you pass away, you need life insurance. Most Americans have thousands of dollars worth of debt — according to an Experian study, the average American consumer debt was $96,371 in 2021. Life insurance isn’t just there to help support children, either. Spouses, parents, children, dependents with disabilities and even business partners are people you may want to protect by having life insurance coverage.

Are there people who don’t need life insurance?

Although some people say that you don’t need life insurance if you don’t have dependents, most people do need life insurance for one reason or another. And people who don’t technically “need it” often want the life insurance coverage to multiply their legacy. 

For most Americans, it’s highly unlikely that you’ll have enough liquid cash to pay off all of your debts, provide enough money to cover liabilities like cash flow on a mortgage, build assets for retirement and keep a healthy reserve for unexpected expenses all at the same time. 

Life Insurance can help you cover all these needs, and the cash value in certain types of  permanent life insurance can be an additional asset to you that increases your overall net worth and allows you to recover the cost of insurance over time if everything is properly managed. The benefits of owning the right combination of life insurance for your situation almost always outweigh the drawbacks, which we’ll discuss next.

Pros and Cons of Life Insurance

It’s always good to understand the life benefits of life insurance as well as the drawbacks and what you can do to prepare for those drawbacks.

Pros

• Security and protection. It may be cliche, but life is unpredictable. It’s easy to be fearful of all the unfortunate things that can happen, but life insurance can give you and your family greater financial security and peace of mind. At the very least, most people want enough life insurance to ensure that their loved ones will be safe and taken care of in terms of food and other living expenses, tuition costs, outstanding debt, etc.
• Tax-deferred growth. With permanent life insurance, part of your premium will build equity called cash value which you can access via policy loan during your lifetime. Cash value growth above premiums paid is tax-deferred, and thus also a low-risk way to increase your net worth. 
• Borrowable funds. A well-designed permanent life insurance policy will build cash value quickly and allow you to access a similar amount of money through a policy loan. Any outstanding policy loan will be deducted from your death benefit if you die, or your net cash value if you live, so there is no requirement to repay the principal within a certain time. Although you don’t have to pay the money back, it’s wise to prioritize where your money is needed most, and usually, it is wise to repay a policy loan over time
  
  As long as you’re wise about taking loans and repaying them, this arrangement can be exactly what you need for additional liquidity/cash-on-hand.

Cons

• Cost. The upfront cost of permanent whole life insurance can seem expensive for an asset where you don’t want to see an immediate payoff through the death benefit. But over time the cost of buying whole life insurance is less than the cost of buying term insurance which is temporary and must be renewed periodically at higher rates. 
• Potential mismanagement. If you take out a life insurance policy just to get some permanent insurance or take a policy loan just to get some extra cash without making a repayment plan, you can end up mismanaging your funds and do more harm than good. Getting the proper coaching and educating yourself on the best strategies for life insurance funding and policy loan management can help prevent negative scenarios.

How Does Taking Out A Life Insurance Policy Work?

Life insurance is a contract between an insurance company and a policy owner. The policy owner agrees to pay a premium while the insurance company agrees to take some risk by providing the death benefit protection and perhaps fulfilling other provisions in the contract if/as applicable. 

Some insurance companies offer life insurance directly to the public, but typically you work through an agent to access a wider range of products and sometimes lower costs by going through a traditional underwriting process.

Your premiums are determined by factors like the policy type, your age, gender, medical and family health history, occupation, whether and to what extent you participate in dangerous pastime activities such as skydiving, etc., and how long you want a policy to provide coverage. The overall cost of life insurance will also be influenced by the provider/insurance company you choose, so it’s wise to research the options available to you and work through an experienced agent who understands how to design policies for strong and sustainable values, and can represent more than one company to give you a wider perspective of the options available to you.

Types of Life Insurance

There are multiple kinds of life insurance, but the two main categories are term life insurance and permanent life insurance. Depending on your personal circumstances and goals, you may need one type or a combination of term and permanent insurance for the best overall coverage. . Some topics you’ll want to discuss with your insurance agent to decide on a policy type are

• How much coverage you need
• What the premiums will be
• If you want the option to borrow on your cash value
• If you want any riders (optional features or coverage that usually come at an additional cost)

Both types of policies have attractive features as well as drawbacks, so let’s go over some specifics for each policy type.

Term Life Insurance

A term life insurance policy offers coverage for a predefined number of years and does not build any cash value. It’s a temporary policy, which is the main downside for most people. It will offer a  death benefit payout should you die within the established term which is usually 10, 15, 20, or 30 years. 

Initially, this is the most affordable type of life insurance policy, which partially explains why it’s also the most common. It’s also important to note that though cheaper, in the beginning, premiums will increase substantially at the end of the term period. Sometimes, you can get a convertible term life insurance policy so that you can eventually convert to a type of permanent life insurance without further underwriting.

There are multiple subcategories of term life insurance, such as

• Increasing term. These policies consider inflation so if the cost of living increases, the payout increases by a fixed amount. This is the most expensive type of term life insurance.
• Decreasing term. In contrast to increasing term insurance, the decreasing term will have lower premiums but decreasing coverage over time, which may be ideal if you know your liabilities, such as the balance on a mortgage, will decrease during the term as well.
• Level term. This coverage has fixed payouts, with more average premium costs—higher than decreasing term, but usually lower than increasing term insurance. This is often a good option for young families.
• Family income benefit. Rather than receiving a lump sum payment, the beneficiaries will receive incremental monthly payments from the time of the claim to the end of the term coverage. This usually means both the premiums and the payouts will be lower overall.

Some people may wonder, “is life insurance worth it if it’s temporary?” Relatively low premiums are especially attractive for many policyholders, but remember: term life insurance is always a temporary solution. Term policies can still be a good option depending on your circumstances, but a permanent life insurance policy is often a  preferred choice long term.

Permanent life insurance

Unlike a term life policy where your death benefit depends on whether or not you pass during the predefined term of coverage, a permanent policy offers lifetime coverage. Permanent policies also accrue cash value that you can later use as collateral for a policy loan 

This offers more security, but premiums are also more expensive, particularly up front. Long-term the net cost for a good permanent policy is usually less than for temporary coverage because premium costs can be fixed.

Under the permanent life insurance umbrella, there are two primary subcategories: whole life insurance and universal life insurance.

• Whole: This type of permanent insurance has fixed premiums and guaranteed cash value accumulation, making it the most secure option. In fact, at McFie Insurancewe believe whole life insurance is the only type of life insurance that truly deserves a “permanent” classification. 
• Universal: This type of permanent insurance offers flexibility for premiums and death benefits, but there are fewer guarantees in terms of cash value and future requirements. You can adjust your premiums and death benefit in the early years of a policy, but this flexibility can end up costing you more in premiums as you get older.

Certain types of universal life insurance may also be tied to the stock market or mirror an index which adds to the risk you assume as a policyholder. Even though universal life insurance policies are classified as permanent life insurance, we don’t consider them permanent at all due to the lack of guarantees and high risk that is transferred to the policyholder.

Overall, permanent coverage is more expensive, but a well-designed whole life insurance policy is also more secure and makes the most of your premium dollars over time. If you can afford it, whole life insurance designed for strong and sustainable cash values is usually your best long-term option. Sometimes a combination of term and whole life insurance can be a great fit to cover both short–term and long-term insurance needs.

Frequently Asked Questions

Is life insurance a waste of money?

Sometimes, if the coverage does not fit your needs. But a well-designed life insurance policy (or a combination of policies) with affordable premiums is usually not a waste of money and can be a very wise asset purchase. If you’re still asking yourself, “is life insurance worth it?” then give us a call at 702-660-7000 and talk to someone on the McFie Insuranceteam to discuss your situation.

Can life insurance be used to contribute to my preferred charity?

Yes, you can select a beneficiary for your life insurance outside of your family or friends, including an organization. This is a popular choice for single-policy owners who don’t have children and still want the living/McFie Insuranceof owning life insurance. As long as the charity, church, or other entity is listed as a beneficiary on your policy, they will receive their portion as designated.

Can I use my life insurance policy as my main savings account?

Over time, life insurance cash values can be an excellent form of long-term savings and liquidity. It may take some time to build sufficient cash values for this purpose.

When should I get life insurance?

When it comes to getting life insurance, the younger the better. Other indicators that it may be time to reconsider/update your coverage is upon certain milestones such as getting married, having children, or buying a house.

Is Life Insurance Worth It?

For most people, life insurance is absolutely worth the money it takes to have security and peace of mind in the face of potential catastrophes. In addition, life insurance is often a worthy and lucrative asset to build and protect your wealth. 

You don’t need to make a decision on your own, either way. As you consider what life insurance is the best option for your needs, check out our Life Insurance 101 for more information. Then, when you’re ready, schedule a strategy session with us to discuss your options and any questions.

by John T. McFie
I am a licensed life insurance agent, and co-host of the Wealth Talks podcast.
At age 14 I started developing spreadsheet models and software systems to help my Dad share financial concepts with clients. 
Skipped college at 17 recognizing the overinflated value and prices of most college degrees and built more financial software instead (see MoneyTools.net). Still a strong advocate of higher education without going to college.  I enjoy making financial strategies clear and working through the numbers to prove results you can count upon.