Life insurance can be a valuable financial tool to provide for your loved ones after your death. Having life insurance can help you plan for the future and bring you peace of mind.
While life insurance can offer a number of advantages for many people, others may have reasons why buying life insurance may not be worth it. Life insurance is not a scam, but these policies are not designed for everyone, and making monthly payments toward a policy doesn’t always have a significant upside.
Learn more about the advantages and downsides of buying life insurance, about the different types of life insurance, and when life insurance may not be worth it.
KEY TAKEAWAYS
- Life insurance offers a way to provide financial support for beneficiaries after the plan owner’s death.
- Basic life insurance policies can approximately match what the policy owner was making or a percentage of it.
- You can buy either term or whole life insurance; which is best will depend on your needs and financial situation.
- Life insurance may not be worth if you have no dependents, if you have a tight budget, or if you have other plans for providing for them after your death.
Types of Life Insurance
The two main types of life insurance are whole and term. With whole life insurance, also called permanent life insurance, your policy lasts until your death. You will typically pay a larger premium than you would for a term life policy with the same benefit, but your policy will also have a cash value component. So, you can use funds built in your whole life insurance policy to take out loans or make withdrawals while you are still alive.1
Term life insurance is life insurance that is only for a set time period, such as 10, 20, or 30 years. Premiums are usually more affordable with term life insurance, so they are better suited for people with a tight cash flow. With term life insurance, there is no cash value component.2
How Life Insurance Works
When you buy a life insurance policy, you pay a fixed amount each month called a premium. When you die with a life insurance policy, your beneficiary or beneficiaries will get the benefit named in the policy.
Your life insurance premium will be based on a number of factors. First, it will depend on the size of the benefit named in the policy—the larger the benefit, the higher the premium. Your age and health will also play a role in how much life insurance costs. The older you are and the shorter your life expectancy, the more expensive your life insurance will be. For term life insurance, the length of the term will also play a role in the cost of your premium.3
Advantages of Life Insurance
Life insurance can provide financial benefits to your loved ones. For example, the money can help pay for the costs of your funeral service to help your loved ones avoid financial hardship. The median cost of a funeral service with a burial was $7,848 in 2021.4
A life insurance benefit can be used to replace your income that may have been paying for your dependent’s needs. Your beneficiaries are not required to pay income tax on the benefit.
Reasons Not to Buy Life Insurance
You may not need life insurance for a number of reasons, such as if you don’t need to provide for someone after your death, if you have no room in your budget for premium payments, or if you have other plans to financially support your loved ones.
No Dependents
Life insurance is designed to provide for people who would be at financial risk in the event of your death. So, one reason why you might not need life insurance is if no one depends on you financially or you do not need to ensure someone’s financial health in the event of your death. For example, you may have no children, or you may have children who are in good financial health.
Tight Budget
Another reason why you may not want to buy life insurance is if you don’t have enough cash flow to pay for the premiums. If your budget is tight, you will likely want to prioritize paying for necessities like housing, clothing, utilities, and food before you pay for life insurance.
Other Financial Plans for Beneficiaries
Finally, you may not need life insurance if you are planning to provide for your beneficiaries in other ways. For example, you may have an investment account that you believe can meet their financial needs in the event of your death.
What Type of Life Insurance Should I Buy?
The type of life insurance you should buy will depend on a number of factors. First, you’ll want to consider how long you’ll want to have the policy. If you only need the policy for a fixed term, you may want to consider term life insurance, which has lower premiums.
If you want to have your policy in place for your entire life, you’ll want to consider whole life insurance. This type of insurance is more expensive, but it builds value and you can borrow against these funds or make withdrawals.
Is life insurance a scam?
Life insurance as a financial product is not a scam, but some disreputable companies may try to sell you life insurance in a fraudulent way. Common life insurance scams include scams related to beneficiaries, false contracts, premium diversion, or fee churning, among others. If you buy life insurance from an established, reputable financial firm, the product will rarely be a scam.5
What are reasons not to buy life insurance?
Reasons not to buy life insurance can include not having beneficiaries, not having beneficiaries who need financial support in the event of your death, or not having enough cash flow to pay for premiums. You may not need life insurance if you have other plans to provide for your beneficiaries after your death, such as with other assets.
The Bottom Line
Learning how life insurance works and about the different types of life insurance is the first step in determining whether life insurance is right for you. Life insurance can offer many advantages, but for some people, there are a number of possible reasons why life insurance may not be worth it.
