Many folks wonder is life insurance worth it.  The reality is that it depends on your situation. Let’s start with what life insurance is.

Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of the policy holder.

Life policies are legal contracts and the terms of the contract describe the limitations and also most importantly, where the insurance takes affect and covers the person that is paying for the insured events. Life insurance includes whole life insurance and term life insurance, which will be discussed.

Whole Life Insurance

Whole life insurance is a life insurance policy which is guaranteed to remain in force for the insured’s entire lifetime, provided required premiums are paid, or to the insurance company’s designated maturity date. Premiums are fixed, based on the age of the beginning/starting of the life insurance plan, and usually do not increase with age. The insured party normally pays premiums until death, except for limited pay policies which may be paid-up in 10 years, 20 years, or at age 65. Whole life insurance belongs to the cash value category of life insurance, which also includes universal life, variable life, and various endowment policies. A whole life policy is have said to “mature” at death or when the person who has purchased the life insurance has reached the ripe maturity age of 100, whichever comes first. Usually, it is death. To be more exact the maturity date will be the “policy anniversary nearest age 100”. The policy becomes a “matured endowment” when the insured person lives past the stated maturity age. In that event the policy owner receives the face amount in cash. With numerous many modern whole life insurance policies, issued since approximately the year 2000, maturity ages have been increased to the older age 120. This is due to lengthened life expectancy, as well as greater access to health care for most people. Increased maturity ages have the advantage of preserving the tax-free nature of the death benefit. In contrast, a matured endowment may have substantial tax obligations.

Term Life Insurance

Term life insurance is life insurance that provides coverage at a fixed rate of payments for a limited period of time. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the life insured dies during the term, the death benefit will be paid to the beneficiary. Term life insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time. Term life insurance is quite different from whole life insurance which guarantees coverage at fixed premiums for the lifetime of the covered individual unless the policy owner allows the policy to lapse. Term insurance is not generally used for estate planning needs or charitable giving strategies but is used for pure income replacement needs for an individual. Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not provide for a return of premium dollars if no claims are filed.

Is term life insurance worth it?

Term life insurance is intended for temporary use and has no cash value, while whole life insurance has cash value. For example, a person purchased a whole life policy, and names his or her spouse as beneficiary. Say the aforementioned person whom bought the life insurance later died. If policy face amount $50,000, less outstanding loan – 22,000, dividend values +45,000, then the death benefit of $75,000 will be paid to his/her spouse. So the answer to “is term life insurance worth it”, is probably not. Life insurance is necessary although most people will never use it.

Why Do People Buy Life Insurance

Life insurance is used to compensate with large amount of money, for example, 10 times of insurer’s salary if the insurer who bought the life insurance policy has an accidental death. Accidental death is definitely not common at all, but is actually very much possible in some occupations that would require daily contact with many dangerous materials and/ or machines. One job could be a steelworker. The other one could be a SWAT team operator, who faces dangerous situations every day. Life insurance provides peace of mind to ensure that the insurer’s family will be taken care of with sudden loss of the insurer. My Dad didn’t purchase life insurance before I was born, since his salary was a lot lower at that time, but also he had no beneficiary other than his wife who is my mom. She also had a job that she could sustain herself with. Despite what was mentioned previously, my dad started paying the premium after my birth since raising a child needs lots of money, and in the absolutely rare case of accidental death, whole life insurance would cover the family with the salary (100 percent) that would’ve been given to my family.

Minimum Term for Term Life Insurance

The simplest form of term life insurance is for a term of one year, which is common for people who are not sure with life insurance, and are on the border between whole/full life insurance or no life insurance at all. The death benefit would be paid by the insurance company if the insured died during the one year term, while no benefit at all is paid if the insured dies one day after the last day of the one year term. This is why I would say life insurance is only worth it if it is whole, not a term life insurance. The premium paid is then based on the expected probability of the insured dying in that one year. Because the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchase of only one year of coverage is rare.

Life Insurance Doesn’t Go On Sale

Sadly, the Life insurance premium has consistently been kept increasing for a very, very long time. it’s grown pretty big as well. For example, my Dad purchased term life insurance 10 years ago with premium $20/month, and the premium has increased to $42/month in this year. The premium is still very low comparing to other items such as car insurance or health insurance because claims for life insurance are very rare. But with catastrophic natural disasters such as recent tornado in north Texas (this is where I live), life insurance companies also need to increase the premium to keep their revenue and profit. This system, the one of both whole life and term life insurance is very similar to the system used in car insurance and other forms of insurance. After all, these are all forms of insurance.

Life Insurance Benefits are Tax Free

The entire death benefit of both whole life insurance and term life insurance policies are free of income-tax, except in unusual cases. This includes any internal gains in cash values from whole life insurance.

Cash Value Gains or Surrenders May Not Be Tax Free

However, when a whole life insurance policy is cashed out before death it’s a different story. With cash surrenders, any gain over total premiums paid will be taxable as ordinary income. The same is true in the case of a matured endowment. This is why most people choose to take cash values out as a “loan” against the death benefit rather than a “surrender.” Cash Value Life Insurance is basically just full or whole life insurance. Cash value is named what it is because you are given cash in case something were to happen. What usually is referred to as life insurance is just term life insurance. This type doesn’t have any cash value… Term vs. Whole, the term is way, way less coverage, but also has a lot more coverage.

Loans from Cash Value

Any money taken as a loan is free from income tax as long as the policy remains in force. For participating whole life policies, the interest charged by the insurance company for the loan is often less than the dividend each year, especially after 10-15 years, so the policy owner can pay off the loan using dividends. If the policy is surrendered or canceled before death, any loans received above the cumulative value of premiums paid will be subject to tax as growth on investment. In the US, premiums paid by the policy owner are normally not deductible for federal and state income tax purposes, and proceeds paid by the insurer upon the death of the insured are not included in gross income for federal and state income tax purposes.

Estate Issues

However, if the proceeds are included in the “estate” of the deceased, it is likely they will be subject to federal and state estate and inheritance tax.

Tax Shelter

Cash value increases within the policy are not subject to income taxes unless certain events occur. For this reason, insurance policies can be a legal and legitimate tax shelter wherein savings can increase without taxation until the owner withdraws the money from the policy.

MEC - Modified Endowment Contract

In flexible-premium policies, large deposits of premium could cause the contract to be considered a modified endowment contract by the Internal Revenue Service (IRS), which negates many of the tax advantages associated with life insurance. The insurance company, in most cases, will inform the policy owner of this danger before deciding their premium.

The tax ramifications of life insurance are somewhat complex, as always. This is an issue. Many people do not want to pay the high taxes associated with life insurance policies. This is where the debate comes in. The policy owner should 100%, always be well advised to carefully consider and work both with and around them. As always, but usually not related to these life insurance policies, both the United States Congress and each state legislature can change the tax laws at any time.

Is life insurance worth it?

That depends on your situation and the type of life insurance you buy. If you are still young, your parents still have a life insurance policy on you, you have no debt, and no one financially depends on you, life insurance isn’t worth it. The only other time that you won’t need life insurance is when you have built up enough wealth that your family would be able to continue their normal life without you earning money anymore (called self-insurance). Other than that, the absolutely extremely simple formula says that you should have about from 8 to about 10 times your personal yearly earnings completely covered in your life insurance plan or package. That can change severely if you have loads on loads of debt (in which one such example is loaning to buy an expensive car, or such as a jumbo mortgage on something you need, like a house) or have no debt at all, have 4 or more kids, a very large retirement account, etc. Is Life Insurance worth it? Life insurance is worth it but only if you make sure that you get the 100%, completely right type of life insurance for the situation that you are currently in. The purpose of life insurance is to help your loved ones out financially when you pass away. If you have young children and are the sole income earner in your home then you want to make sure that your life insurance offers a generous payout that will take care of your entire family in case you die. If you are a young person yourself, don’t have children and have parents who are still financially independent then you don’t need to have as much life insurance coverage. It will still be worth it to get life insurance in this situation but the policy that you select will be different from the person who has a family to support. Personally, I do not have any children, nor do I have a spouse, so I choose not to buy life insurance. Even if I die, the money will not need to go anywhere. Also note that there are many options that you can add to life insurance, such as accidental death insurance, that can be worth it for some people and not for others.