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Weighing the Pros and Cons of Life Insurance

Life insurance, regardless of the type of policy, provides financial security to your dependents in the event of your death. And, as a general rule, when you have more life insurance, your beneficiaries will typically receive more benefits. For instance, let’s say that you have $30,000 of life insurance through your employer. On paper, that may seem like a lot. However, this amount may only be able to cover your funeral expenses and a couple of mortgage payments in reality. 

However, when you increase your coverage amount, your and your dependents can have far more benefits, including:

  • Providing income replacement after years of loss of income
  • Getting a mortgage paid off
  • Paying off other debt, such as credit card debt and student loans
  • Funding your kids’ college education
  • Supporting other obligations, including caring for aging parents

Other benefits can be provided by different types of policies besides your coverage amount:

  • A life insurance policy has tax advantages, since death benefits are generally tax-free. In addition, some policies have features that enable them to transfer money to heirs when their tax liability is lower.
  • Many policies have an accumulated cash value that can be used for premium payments in the future, or even to help people live off of in retirement.
  • In addition to life insurance, disability insurance may replace a portion of your income in the event of disability.
  • There are many insurance policies with riders, or contractual provisions, that guarantee living benefits before death.


Different Life Insurance Types, Different Benefits

As you know by now, life insurance policies can be either term or permanent. Again, term life policies require you to pay a specific premium for a specific period of time, for example 10 years. If you were to die during that time, your beneficiaries will receive a death benefit. But, after that, you must purchase new coverage or go without it. On the other hand, permanent life insurance will last your entire life.


What are the benefits of term life insurance? 

  • Generally, lower costs than permanent life insurance policies.
  • This is a simple insurance product making it easier to understand.
  • You may be able to convert it to a permanent life insurance policy, but it’s a good idea to check before you buy.
  • You won’t lose anything more than the premiums already paid if you no longer need the policy or can’t afford it.


What are the benefits of whole life insurance? 

  • Provides lifelong coverage and is only terminated when the insured dies or surrenders the policy.
  • Earns cash value. You can also borrow against or take out the cash value of this savings account to use it as a collateral.
  • Premiums never change, meaning you’ll pay the same amount each month.
  • The death benefit will be a guaranteed amount of money.
  • Cash value grows on a tax-deferred basis and can provide tax-advantaged estate planning benefits.


The Pros of Life Insurance

In many cases, life insurance is a foundation for financial planning. What’s more, a life insurance policy may have benefits that continue long after someone’s death — depending on the coverage. Life insurance has many benefits, among them the following.


Financial protection for your dependents. 

Its functional purpose is also the main benefit of life insurance. You can buy life insurance by paying a relatively small premium each month in exchange for a much larger death benefit if you die. A high enough death benefit will pay for your kids’ college tuition and living expenses, including the mortgage. In addition, it provides a financial cushion in case of unforeseen costs or emergencies.

Unlike funds inherited or left to loved ones in your estate, your beneficiaries will receive your death benefit as a tax-free lump sum. Rather than tying up your estate funds with hefty taxes and legal fees, purchasing life insurance when you die ensures the funds are issued immediately to your beneficiaries.


Gives you inner peace. 

If you buy homeowners or auto insurance, you’re probably hoping you won’t experience a car accident, burglary, or flood. And a term life insurance policy is similar, you hope you won’t need it. 

While it’s true that you won’t get the premium money back if you exceed the term, it’s still a valuable asset. Mainly that’s the peace of mind that your dependents will be taken care of if something drastic were to happen to you. 

In short, life insurance can provide enormous peace of mind, especially if you have children or a partner, since it can guarantee a financial backup plan for those who depend upon your income. And, for those seeking inner peace, term life insurance is often less expensive and time-consuming than going on a yoga retreat. 


It’s more affordable than you think. 

Life insurance is available in many forms, each tailored to fit a specific set of needs. Life insurance that lasts a fixed number of years, such as five years or more, is term life insurance. This type tends to be the least expensive policy on the market due to its lack of permanence. The cost of an insurance policy will increase if you want the policy to last your entire life or want flexibility in premium payment.

You should also shop around to determine if you can find a cheaper rate for similar policies from other companies.

The bottom line is that there is generally a policy that will fit your needs, no matter what your budget is.


Expands your financial portfolio. 

Unlike other types of life insurance, permanent life insurance policies (known as permanent policies) can increase your net worth. A cash value policy (also known as a living benefit because you can access it before death) is a savings or investment account that accumulates funds as you pay your premiums and earns interest.

Most people use life insurance policies as a way to diversify their retirement savings or “force” themselves to put away extra money for emergencies. If you need a loan to cover medical expenses, long-term care, or any other expense, you can take out a loan against cash value. If you fail to repay all loans from your policy, any death benefit your beneficiaries receive will be reduced by the amount owed.


Tax favored status. 

With life insurance, you may be able to enjoy tax benefits such as tax-free death benefits and tax-deferred cash growth.

  • Tax-free death benefit payout. The sole purpose of buying life insurance when leaving an inheritance to your spouse or children may be to avoid estate taxes in the event of your death. Most death benefits are tax-free. So if you set up your policy right, you will not have to worry about Uncle Sam taking a big chunk out of your estate. Tax benefits from life insurance are generally more of a perk to most. As a general rule, your policy’s beneficiaries won’t owe taxes on the cash they receive.
  • Tax-deferred cash value growth. You don’t have to claim any interest your account earns if you buy a cash-value policy. The cash value in this account can be accessed tax-free by those who wish to borrow it.


Savings when you need it. 

With whole or permanent life insurance, you can borrow or withdraw cash value accumulated over time. Your specific policy will determine how much you are eligible for and how much tax is due. The cash value can be used as a supplement to retirement savings or cover expenses like long-term care. 



There’s no telling what life has in store for you, and life insurance is like a Swiss Army knife for your finances. Regardless of whether you purchase final expense life insurance specifically, your beneficiaries are free to utilize the death benefit payout for whatever expenses they choose. Families can use the money to pay down their mortgage, send the kids to college, or feed their families.

Depending on your policy, you may enjoy flexibility as well. You can, for example, adjust the premiums and death benefit payout for universal life insurance as needed. With a conversion option, you can get lifetime protection with a term life insurance policy.

If you come down with a terminal illness, there are optional riders that let you withdraw part of the death benefit while you’re still alive. So, if you were diagnosed with cancer, this could help pay for expensive chemo treatments. Or, if you became disabled and could no longer work a waiver of premium rider will waive this fee. 


Makes you think about death — but not for long.

Did you know that the percentage of people with living wills is only one third? Therefore, it’s  crucial for families to discuss what each of their members would like if they unexpectedly died or were unconscious. 

While you’re talking about life insurance, it might also be worth discussing preferences to be outlined in your wills, especially since you can create them at no cost as one of the several benefits of buying life insurance. 

As soon as you’ve had the death conversation, it’s over and done with. Life insurance is no different. Now that such weighty matters have been resolved, you can go about your daily business in a more relaxed manner. That may be its greatest advantage.


It’s never been easier to apply. 

Life insurance companies are notorious for being behind the times — especially when it comes to online applications. Thankfully, more and more companies, like Due, offer you a fully-online application that can be filled out in a matter of minutes. In some cases, you may not be required to undergo a medical exam. Regardless, it’s never been easier to obtain affordable life insurance than it is today.  easily so you can get protection right away.


The Cons of Life Insurance 

In most cases, the pros of life insurance outweigh the cons. Still, there are drawbacks to life insurance that you should be aware of before committing to a policy. 


You have to qualify. 

For life insurance, you typically had to undergo a medical exam, which included blood tests and urine samples. You could either be postponed or declined if you failed the life insurance underwriting criteria. Moreover, approvals can take six to eight weeks, or longer, with conventional fully underwritten policies.

Fortunately, as the market changes, many companies are opting for no exam life insurance that relies on automated accelerated underwriting. Most people can expect their approval within 7-10 business days if they qualify for accelerated underwriting, which often bypasses the medical exam.


Sales commissions. 

A life insurance policy should not be purchased by yourself. Instead, you should work with an agent. But, this can also be problematic. 

This leaves consumers vulnerable to insurance agents who might not be acting in their best interests. For instance, you could be led to buy more comprehensive insurance that you don’t need, or you could be given recommendations that will increase their fees. To avoid signing anything you’re not comfortable with, you should always conduct ample research before applying for life insurance.


It can be expensive. 

You can save the most on life insurance by being young and healthy. After all, the prices of life insurance coverage are determined by your medical history, family medical history, and age. So if there is anything in your profile that could potentially raise the chances of your death early, you’ll be charged more for coverage. What’s more, life insurance may be helpful for your loved ones but devastating for your finances if you’re so unhealthy that you already have a significant amount of medical debt.

However, since most people earn more money as they get older, this extra cost may not be an issue. But, the fact remains, the younger you purchase life insurance, the cheaper it will be. 

The exception, though, is permanent life insurance which is often expensive regardless of your age. In fact, the Society of Actuaries found that over 45% of people with whole life insurance policies cancel their policy within ten years due to excessive premium payments. 

As a refresher, permanent life insurance policies, such as whole life insurance, are more expensive since it provides lifetime coverage. 

But most people don’t need life insurance as much after they retire if they are debt-free, their home is paid for, and they don’t have dependents. In other words, spending extra years paying whole life insurance premiums after retirement won’t return as much value as you might expect.


Requires a lot of planning and research. 

It is a lifelong process to purchase life insurance. First of all, it can take several weeks to complete the application process, and you may have to take an exam to get a life insurance policy. Even if you choose to forego exams, you may need to plan further out – at least the next decade or two.

It’s likely that many policies will last you as long as you live — ideally a number of decades. No matter what life throws at you, you’re covered with an insurance policy with plenty of flexibility. Or, you can come up with your own ladder strategy.

Choosing a reputable insurance company is also crucial. It’s easy to determine whether a life insurance provider is financially stable using a few simple tips. Most notably, the strength of a company’s finances that has been rated by several rating entities. They are:

  • AM Best
  • Moody’s
  • Fitch
  • S&P

You can easily search for individual companies on the websites of each company.

What’s another great indicator that a company will thrive in the long run? Longevity. As you conduct your research, you’ll notice that most top companies today were founded in the 1800s.

Finding the right insurer and policy requires some research, as you may have guessed from the above section. Knowing how life insurance works, the different types of policies and how each insurer’s products differ could be key in choosing the best policy.

This information can sometimes be difficult to locate. Unless you speak directly with an agent, many insurers are tight-lipped about their policies, and the details of different policies may even conflict.

You may have better investment options. 

Most life insurance policies have a cash value component that can be invested safely. The return rate may be lower than an IRA or any other investment.  Compared to stocks, for instance, cash value life insurance’s investment portion offers a very poor return. 

Are there other ways to invest the money that could make you more money? If you have a very conservative investment style, then probably yes. As such, most people decide to fully fund their 401(k), Roth IRA, and other assets before investing in the cash value of a life insurance policy. 


Reminds you about your responsibilities. 

Another disadvantage of life insurance? 

The increasing number of responsibilities makes you aware of their importance. The reason you get life insurance isn’t for yourself, but for everyone who depends on you. Being a parent and/or a spouse, or having children can be potentially shocking because you owe debts and have financial obligations that may outlive you.

If the worst should happen, you will have sensible plans in place to handle those responsibilities. That’s the major benefit of getting life insurance. And, despite the discomfort, this should ultimately provide you with peace of mind. 


Forces you to think about your mortality. 

Life insurance has one final disadvantage: it may cause your sense of worth to be reset. Our salaries and wages are based on what we’re worth annually, daily or hourly. Beyond that, though, our value becomes increasingly ambiguous. Yet life insurance places a price on your head, like you’re the infamous Billy the Kid. 


How to Get the Most Out of a Life Insurance Policy 

Invest in life insurance early.

If you get life insurance when you’re young and healthy, you’ll save hundreds of dollars on your premiums. Getting the coverage you need in your 20s can save you money when you expect to have dependents in your 30s. You’ll also get the coverage you need even if you don’t need it right away.


Be honest when you apply for life insurance.

After a life insurance policy is issued, it is contestable for two years. Your application may be investigated during this time if you die and the life insurance company believes you lied about your health or if you have risky hobbies that you failed to mention during the application process.

It is possible for your insurer to refuse the beneficiary’s claim to your death benefit if they discover that you made false statements to get cheaper coverage, or to pay out a reduced death benefit based on the premiums you should have paid.


Don’t buy more coverage than you need and invest the rest.

When you budget properly, you can take advantage of coverage while still making high contributions to retirement accounts. As a result, you’ll always have financial security.

In most cases, term life insurance is all people need. However, some people find that permanent  life insurance suits their financial plan better. Comparing the returns on different retirement accounts with those on cash value life insurance policies can provide you with an idea of which returns are better – standalone retirement accounts will generate higher returns than those on cash value life insurance. To figure out how much to contribute to your savings accounts and what level of coverage to purchase, consult a financial planner.

Hopefully, your dependents won’t need to claim life insurance. But if you die while your policy is active, they will have basic expenses covered, as well as mortgage and education payments.


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