Just over half of Americans have some form of life insurance, according to a study by LIMRA and Life Happens. This proportion has been growing as many of us become acutely aware of increases in the cost of living. People have different motivations for purchasing it, but it’s worth considering whether you should invest in life insurance.
To answer this question, it helps to first examine how life insurance works and review the major reasons that Americans cite for purchasing life insurance. As a bonus, you’ll also learn about another product that these companies offer that may suit your needs more flexibly.
How Life Insurance Works
Life insurance policies are a bit different from other kinds of insurance, like health insurance and auto insurance. There are no government mandates instructing you to purchase this type of insurance, and for many people, it may seem irrelevant. In general, life insurance pays out in the event of your death or permanent disability. Especially for young Americans, these possibilities can often seem so far removed from everyday life that they don’t consider the need for it.
Despite the lack of mandates and how far away the need may seem, there are actually benefits to purchasing a policy as early as you can. Life insurance premiums are based on several factors related to health, and one of the most important is your age. Purchasing $1 million dollars of coverage at age 24 may lock in a low rate that could be two, three, five, or even 10 times more expensive just 10 or 20 years later, depending on other variables.
There are also two major kinds of life insurance: whole and term. Whole life insurance functions as an investment with a maturity date. This type of policy is typically more expensive for the amount of coverage, but it builds equity as you pay the premiums, eventually resulting in a fund that you can use during your retirement. It also allows you to cash in a part of the policy in times of need.
Term life insurance is more limited in utility but less expensive. In exchange for saving money on your monthly premiums, this life insurance is only valid for a limited period of time, such as 10 years. Further, this type of policy does not generate any equity, meaning that the money you spent is gone if you outlive the policy’s ending date.
Why You Might Need Life Insurance
Considering the two forms of life insurance, it’s reasonable that the millions of Americans who purchase policies have many different reasons to have this coverage. For young professionals, starting a life insurance policy early can be an investment toward retirement while also providing protection for the families they plan on having. Those who already have children and are in the prime of their careers often invest in a less expensive term policy to cover the family’s needs and ensure their children are covered financially in the event of a policyholder’s passing.
There are still single-income households, and the working partner often sees life insurance as a way to ensure the family is taken care of in the event of an accident that causes loss of life or the ability to work. Even those without immediate family may still want to avoid relying financially on more distant relatives and may take out policies intended to cover funeral and estate costs.
There’s an old adage about life insurance that it’s better to have it and not need it than to need it and not have it. Simply put, a life insurance policy can give you and your family peace of mind in exchange for simply paying the monthly premiums. For some people, that’s enough and justifies the cost. However, others want the benefits of paying into a program that can pay out during retirement, so they look into another product that life insurance companies sell: annuities. In fact, so many people have turned to annuities that the Insurance Information Institute reports that life insurance is no longer the #1 product that these companies sell.
The IRS details several kinds of annuities, including a survivor annuity that can pay out to a retiree, then pass on the remainder to a designated heir to secure them a reliable and regular income. For many people planning for the future, this type of delayed and regular payouts adds a level of protection that ensures the payout can be spent at regular intervals.
Ultimately, the need for life insurance comes down to the assets you have and what you want to provide to your heirs and loved ones. If you already have significant assets that can cover them for years to come regardless of what happens to you, then life insurance may be redundant. However, if you have concerns about what will happen when you pass away or are no longer able to work, especially if you anticipate major familial expenses within the next 10 or 20 years, then life insurance may be the right choice for you. Discuss your options with a qualified financial professional to learn more.
Resource Links
“Facts + Statistics: Life Insurance” via the Insurance Information Institute
“Annuities – A Brief Description” via the IRS
“New Study Shows Interest in Life Insurance at All-Time High in 2023” via LIMRA