Life insurance helps you ensure your loved ones are protected in case you unexpectedly pass, and it is the main asset in the protection group of the 5 pillars of personal finance. But despite it being a crucial piece of your personal financial portfolio, it can be complex and confusing. Many people think insurance is a waste of money but here are the top 15 reasons to buy life insurance.
Key Takeaways:
- There are many different types of life insurance for your different insurance coverage needs. Additionally, each insurance company has a different design for each product type, leading to dozens of products you can choose.
- A common complaint about life insurance is the cost, but term allows for cheap coverage with riders that give you flexibility.
- Replacing lost income, protecting your loved ones, estate planning, and tax benefits are all benefits of life insurance.
- Permanent life insurance allows for forced savings through the cash value account and coverage you can count on forever.
15 Reasons To Purchase Life Insurance
Below are the top 15 reasons to purchase life insurance. Many of the reasons apply to all life insurance products – like replacing lost income, protecting loved ones, tax advantages, and for estate planning. Some of the benefits only apply to term or permanent life insurance coverage.
You need to do your own research and consider your individual needs to decide what’s best for you. A financial planner can help you weigh the pros and cons of any particular insurance product.
You also should spend time to figure out how much life insurance you need. There are many methods out there from the DIME method or human life value method, to our preferred DEEM method TM.
Knowing how much life insurance you need and what product best suits your need will help you make an informed decision.
And now, our top 15 reasons to buy life insurance:
1) Replace Lost Income – Primary Reason To Buy Life Insurance
This is generally the main reason for purchasing life insurance. If you were to pass away unexpectedly, your family loses your income. For most families, they can’t maintain their lifestyle after losing an income.
Life insurance can’t help replace you, but it can help to protect your loved ones financially.
2) Cover Cost of Spouse’s Contributions To Family
Life insurance isn’t just about replacing an income stream.
Does your spouse do the cleaning? planning? childcare, shopping, etc?
If your spouse dies, it isn’t just income that needs replacing. You may need to hire help to replace the work they did. This is even more clear if you has a stay-at-home spouse.
Going from a two-parent home to suddenly a one-parent home means significantly more responsibility. Having coverage that allows you to hire help when needed, especially if it is any form of childcare which is particularly expensive, is a use of life insurance.
3) Pay for Children
The previously mentioned childcare expense will certainly be a large part of the cost of kids, but school-aged children also have activities, sports, and basic living expenses that need covering.
If you plan to pay for your child’s college in some amount, you want to ensure you leave enough money for that. Additionally, if you have a child with special needs, you want to ensure they are cared for for the entirety of their lives.
4) Cover Estate Taxes
Yes, the current estate tax exemption is nearly $13 million in 2023, so it only applies to high-net work individuals.
However, it has historically been much lower at various points in time. There is no promise that when you pass, your estate doesn’t get hit with a tax.
Life insurance is one strategy used to in estate planning that can help with a holistic plan to mitigate the cost of estate taxes. You should work with an estate planning lawyer to ensure you choose the right coverage and amount.
5) Life Insurance Can Be Very Affordable
There are many types of life insurance policies for many different uses. Term life insurance is a cheap way to get coverage for a set period of time, unless you have a serious pre-existing medical condition or have previously been denied. (And even then, there are no-exam guaranteed issue policies, group life insurance through an employer or affinity group, or even mortgage life insurance available).
In 2022, the average cost of a 20-year term policy with $500,000 of coverage for a 40-year old was only $26 a month, according to Quotacy. That is less than $1 a day. With the average salary in the US under $60,000 a year, this would be almost 10 years of income replacement for less than a daily cup of coffee.
6) Pay Off Outstanding Debts
One of the biggest financial burdens many face is having high debt. The student loan debt crises is showing how high loan payments can leave people unable to live a fulfilling life.
You don’t want to leave your loved ones with the burden of high-debt loads.
Buying life insurance that is adequate to pay off any debt will ensure your family doesn’t have to shoulder the debt burden. This includes a mortgage so your family can remain in their home. The last thing you want your grieving family to have to deal with is being forced to move from the home they grew up in.
7) Life Insurance For a Business
If you own a business or are a partner in a business, many owners will take out coverage for themselves and their partner. This helps for a smoother transition to keep the business operating.
Many business partnerships have life insurance policies and buy-sell agreements in case one partner dies. The remaining partner can use the proceeds of the life policy to buy the deceased partners shares from heirs who may not want to or know how to run the business.
8) Cover Final Expenses
End of life care can be extremely expensive. Also, the average funeral costs well over $10,000 and people buy final expense insurance to not burden their grieving loved ones with these costs.
Final expense polices tend to be smaller face amount (under $50,000) whole life policies.
However, if you include burial costs in your insurance needs analysis, any policy can help.
9) Build Cash Value – A Reason To Buy Permanent Life Insurance
Permanent life insurance (ie – whole life and universal life insurance) has a cash value component. A portion of each premium goes towards a cash value account in the insurance policy. The money in the account grows based on the type of policy you own and financial markets.
Cash value insurance adds liquidity to your life insurance policy as you can withdraw it or take a loan against it.
Additionally, permanent insurance cash value can be a forced savings mechanism as you pay your premium and some portion is put to work in building your account value.
10) Avoids Probate – Underrecognized Reason To Buy Life Insurance
The probate process is long and expensive, however life insurance transfers directly to the beneficiary upon the insured’s death allowing life insurance benefits to avoid probate. This makes life insurance an efficient and speedy way to pass wealth on to your loved ones.
Using life insurance to move assets out of probate means your family gets money faster, cheaper, and with less administrative headaches.
11) Tax Benefits – Reason Everyone Should Buy Life Insurance
Life insurance cash values grow tax deferred. This makes life insurance policies an alternative tax shelter to individual retirement accounts (IRAs). Life insurance benefits are generally tax-free. There is typically no federal income tax and most states also do not tax life insurance proceeds.
12) Leave A Charitable Gift
A life insurance policy could be purchased to leave to a charitable cause on the insured’s passing. You can donate the policy to a charity, set up the charity as the beneficiary on the policy, or using a trust to disburse the money to the cause over time.
13) Guarantee Protection of Your Loved Ones
The purpose of life insurance is to ensure your loved ones are taken care of if you pass unexpectedly.
Permanent policies will be there until you die, as long as you pay adequate premiums.
Whole life insurance and universal life insurance with a secondary no-lapse guarantee have a minimum premium you must pay to keep the policy active for the entirety of your life.
Your family will receive your death benefit and you don’t need to worry about leaving insufficient funds.
14) Lock-In Insurability
When you are young and healthy, you should get a term life insurance product with a term conversion rider. This rider allows you to convert your term policy to a permanent policy offered by the same insurance company and you get to keep your same healthy underwriting class. This can save you $1,000s vs going and buying a new policy.
But when you convert, you do not have to go through the underwriting process and get your permanent policy at the same underwriting class. The price of life insurance goes up as you get older and if you get less healthy.
By getting a cheap term policy when you are young and in good health, not only do you get yourself coverage, but you have the flexibility to later get a permanent policy at the same healthy risk class.
If you get diagnosed with a disease or become less healthy, this guarantees you a permanent policy for cheaper than you would be able to get if you purchased a new one.
15) Long-Term Care Or Disability Coverage
Life insurance doesn’t only need to provide coverage in death, many policies have optional riders that add additional coverage to your policy. Many of these riders have ‘living-benefit’ rider options like accelerated death benefits and/or disability & long-term care riders.
These riders will pay you or let you use your death benefit to pay for costs if you have qualifying complications. Additionally, many policies come standard with a waiver of premium rider that allows you to pause your premium payments if you become unable to work.
The Final Word – 15 Reasons To Buy Life Insurance
There are the top 15 reasons to buy life insurance. They may not all apply to you, but many of the reasons to buy life insurance are applicable to almost everyone.
We recommend young people to use a buy term and invest the difference (BTID) strategy, preferably with a term life insurance ladder approach. This allows you to have different levels of coverage, the most flexibility, and ensures adequate coverage at all stages of life.
Then as you make more money and start thinking about estate planning, you can add on permanent coverage like whole life insurance or universal life insurance.
Or, you can extend your term life insurance coverage by utilizing a term conversion rider or the post-level renewable term insurance period.
However, it is hard to deny that having adequate life insurance isn’t a priority for anyone with dependents.
Frequently Asked Questions (FAQs):
Life insurance is a product that pays a death benefit to your named beneficiaries when you die. In exchange, you pay the insurance company premiums for the coverage.
Term life insurance covers you for a pre-determined amount of time, typically 30 years or less. Additionally, term life doesn’t have any cash value build-up. However, it is the most affordable type of life insurance coverage.
Permanent life insurance can cover you for as long as you live. It has a cash value account that a portion of your premium funds and grows with markets. Permanent insurance is more expensive, typically 5 to 15 times as expensive as a similar sized term policy.
No. The average cost of a 20-year term policy with $500,000 of coverage for a 40-year old was only $26 a month, according to Quotacy. That is less than $1 a day. Term insurance’s affordability is a reason to buy life insurance.
There are at least 15 reasons to buy life insurance. These include:
1) Replace Lost Income
2) Cover Cost of Spouse’s Contributions To Family
3) Pay for Children
4) Cover Estate Taxes
5) Life Insurance Can Be Very Affordable
6) Pay Off Outstanding Debts
7) Life Insurance For a Business
8) Cover Final Expenses
9) Build Cash Value
10) Avoids Probate
11) Tax Benefits / Tax Advantaged
12) Can Leave A Charitable Gift
13) Guarantee Protection of Your Loved Ones
14) Lock-In Insurability
15) Long-Term Care Or Disability Coverage
If you have dependents and aren’t independently wealthy, you likely need life insurance. It will protect your loved ones financially if you pass unexpectedly.
There are 10 common reasons why people think life insurance is a waste of money:
1) No Dependents
2) No Spare Room in Your Budget
3) It is Expensive
4) It doesn’t cover your needs
5) Self-Insurance: You have other ways to protect your loved ones
6) Can be a hassle to get, maintain, and file a claim
7) Policy coverage expires
8) You have a pre-existing health condition
9) Difficult to cancel and high surrender charges
10) Enough coverage through your employer