One of the most important questions to ask yourself is what would happen to my family and spouse if I suddenly passed away? Does my spouse earn enough income to continue to provide for the kids, handle our mortgage and other bills, pay for college, etc…? If the answer is no, you may want to look at life insurance as an effective way to protect your family from financial hardship. Your family will already be dealing with the loss of your companionship, so adding financial hardship to their loss is an avoidable burden. At the same time, paying for something you may not end up using can seem like a waste of money, or paying for premiums on top of all of life’s other expenses may seem too much to take on.

So, do you need life insurance? Here’s how to decide if it’s right for you.


How Does Life Insurance Work?

Life insurance is essentially a contract between you and the life insurance company. You pay regular premiums in exchange for a lump-sum death benefit that is paid to your beneficiary (or beneficiaries) when you die. The death benefit can be used for any purpose, including covering funeral costs, possibly paying off your mortgage, covering costs of college or any expenses that would be a burden to your family without your income.

There are two main types of life insurance, each with benefits and features that can provide financial peace of mind now and after you are gone. Below is a brief description of the two main types of insurance. There are many variations of each that our Smart Insurance Group can advise you on and make sure you get the plan that best fits your needs and budget.

Term Life Insurance

One popular type of insurance is term life insurance. As the name suggests, it is meant to cover you for a fixed term. Terms are usually 5, 10, 15, 25 or 30 years. Your premium and death benefit will not change during the term you select. You pay premiums while the policy is active, and if you die during that term, your beneficiary will receive a death benefit. Once the term is completed, you no longer pay premiums and your death benefit expires. You may be able to renew the policy every year after that, but you’ll pay higher rates at each renewal. If you don’t renew, coverage ends and there is no death benefit.

Term life insurance is a safety net that can cover your family during your most financially vulnerable times. Maybe you are the sole bread winner of the family, and you have young children. Or maybe you have a mortgage and college expenses. You might buy term life insurance to ensure your spouse isn’t financially burdened if you die prematurely. Once your children are older, and your debts are paid, it might not be as crucial for you to have life insurance coverage for that purpose.

Term life insurance is typically cheaper than other forms of life insurance. However, the expense rises the older you are so it’s important to consider when term life insurance would be appropriate and for what term.

Permanent Life Insurance

Permanent life insurance is exactly that - permanent. Permanent life insurance policies generally do not expire as long as you continue to make premium payments. Permanent life insurance policies also typically accumulate cash value on a tax-deferred basis. The cash value of your policy can be withdrawn or borrowed against, however, any loan from the policy would result in a lower death benefit for your beneficiaries. The strategy of using accumulated cash value in a policy can be a smart way to pay for major expenses such as college. Cash value builds over time so early in the life of your permanent insurance plan, it serves as that safety net many people need to help ensure your loved ones are taken care of in the event of an untimely death. Life situations can change however, and as you get older and your kids move out to start their lives, your insurance needs may change. The option to borrow against your policy to cover large expenses can be a great tool in your financial arsenal. You will need to continue to pay your premiums and likely an additional loan repayment plan in order to keep your policy active and funded. The exact rules surrounding permanent life insurance and its cash value component depend on the type of policy and individual insurer. Our Smart Insurance Group professionals can help you navigate these and other complexities, but permanent life insurance offers some unique benefits that are worth exploring.

There are several types of permanent life insurance, including whole life insurance and universal life insurance. Contact Smart Insurance Group to go over all of your options and the best plans to fit your needs.

The average cost of life insurance will vary dramatically depending on your health and age, gender, death benefit amount, type of policy (i.e., term or permanent) and more, however, permanent life insurance is more expensive than term life.

How old you are when you purchase a policy can also drastically affect your premium. Buying a term life policy at age 40 instead of age 30 can increase your life insurance quotes by 36%. Waiting until age 50 to buy can increase the cost up to 212%.

Another rather new benefit of life insurance is the ability to accelerate the death benefit due to a qualifying illness or injury and potentially provide a guaranteed source of retirement income if you live "too long".

Accelerated Benefits Riders are optional, no additional cost riders that can allow you to access all or part of the death benefit while you are living if you experience a qualifying terminal, chronic, or critical illness or critical injury

Pros and Cons of Life Insurance

To decide whether buying life insurance is a good idea, it helps to weigh the pros and cons. In many cases, the benefits of having life insurance far outweigh the drawbacks. But life insurance may not be right for everyone. Here’s what to consider.

Pros of life insurance

  • Financial protection for your loved ones, which is one of the main reason to buy life insurance. It provides peace of mind that your family won’t be left struggling financially if you die.
  • Variety of options. When it comes to choosing a life insurance policy, you have lots of choices. There is likely a policy and plan that can fit your exact needs.
  • Cash value. As described above, if you buy a permanent life insurance policy, it will generally have a cash value component that can grow over time. You can choose to take advantage of these funds while you’re alive.
  • Tax benefits. Any cash value growth is tax-deferred. Plus, your beneficiaries don’t need to pay taxes on the death benefit, with the exception if your death benefit goes into a taxable estate. It’s best to consult a financial advisor on implications of your death benefit and plan the distribution in a way they helps you avoid taxes or minimizes the tax ramifications.

Cons of life insurance

  • You have to pay premiums now. Even if you can benefit greatly from life insurance, it is an additional cost that you need to budget for. A young family might have a hard time budgeting for any additional regular expense especially when the benefit may seem a long way off.
  • Cost of insurance increases as you get older. The longer you wait to buy a policy, the higher the premiums will likely be. If you’re a bit older and just now considering life insurance, prepare to pay more than if you had taken out a policy years ago.
  • Medical history can be a factor in your life insurance costs. Health physicals are sometimes required to ascertain certain risk factors such as obesity, high blood pressure or smoking. These factors can raise the cost of insurance because your life expectancy is often shorter when you have certain health risks.

Is Life Insurance Worth it?

If you’re single, you have plenty of money for your family to survive on, or there isn’t anyone financially dependent on you, you likely don’t need life insurance.

On the other hand, if you have loved ones who depend on you financially—or you have debts that would be burdensome for your family if you died—life insurance is likely worth it. It’s valuable financial protection, and is often part of a solid overall financial plan. Smart Insurance Group is here to assist you with this important decision and to help you find the best policy for your needs. It is worth having the discussion now while you have this safety net option for you and your family.

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