The unbiased guide to getting life insurance

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Have you ever wondered if life insurance is something you truly need or just another unnecessary expense? Life insurance can be a valuable financial tool, but it’s not always necessary. This guide will help you decide if it’s right for your situation—whether you have dependents or want to secure financial peace of mind. And remember: online comparison tools are your best friend. Never rely solely on a salesperson to determine what’s best for you.

Life insurance doesn’t have to feel like a daunting topic. With a little guidance, you can determine if it’s right for you. If you have dependents—whether it’s a spouse, children, or even parents who rely on your income—life insurance can provide the safety net they need. But it’s important to find a plan that fits your goals, your budget, and the future you want for your loved ones.

Key Takeaways

• Life insurance is most valuable when you have dependents or others who rely on your income. It acts as a financial safety net to ensure their needs are met if the unexpected happens. For instance, if your income covers rent, daycare, or daily living expenses, a policy can help your loved ones avoid serious financial hardship.
• Term life insurance is often the better choice for most people. Permanent policies are usually more expensive and may not deliver the value they promise, especially if sold using fear-based tactics like “leaving a legacy” or “what if you can’t renew later?”
• Not every policy is worth the cost. Many policies come with hidden fees or unnecessary complexity. Always compare your options using online tools rather than relying on a single salesperson’s advice.
• Major life milestones—like marriage, buying a home, or having children—are ideal times to consider life insurance. But only if those events create financial risks for your loved ones.
• Life insurance can play a role in financial planning, such as covering estate taxes or leaving a legacy, but there are often more effective alternatives, such as trusts or diversified investments.

What Is Life Insurance?

Think of life insurance as a safety net that’s most critical when you have dependents who rely on your income. If something happens to you, the insurance company pays your family a lump sum—known as the death benefit. This money can help cover daily expenses, pay off debts, or even fund big goals like college tuition or retirement savings. However, if no one is depending on your income, a policy is likely not necessary.

When Life Insurance May Not Be Necessary

Life insurance isn’t for everyone. If you’re single, have no dependents, and have enough savings to cover your debts and funeral expenses, a policy might not add value. Similarly, if your spouse is financially independent or you’ve built a strong financial safety net, life insurance may not be needed.

Hypothetical Example: Someone with no dependents and $500,000 in liquid assets likely doesn’t need a policy. Their family would be adequately covered for final expenses. In such cases, your money might be better invested elsewhere.

Types of Life Insurance

1. Term Life Insurance: The Practical Choice

If you’re looking for affordable and straightforward coverage, term life insurance is often the best option. It’s especially useful if you have dependents who rely on your income for a set period—like while your kids are growing up or until a mortgage is paid off.

Pros:

• Budget-friendly and easy to understand.
• Covers a specific period (e.g., 10, 20, or 30 years).

Cons:

• Coverage ends when the term expires, and there’s no cash value.

Key Insight: The common sales pitch that “You can’t renew later” is often just a scare tactic. If you plan properly, you likely won’t need a policy once your term ends.

‍Hypothetical Example: A 20-year term policy can ensure financial support for your children until they’re independent, all for a fraction of the cost of a permanent policy.

2. Permanent Life Insurance: Be Critical

Permanent life insurance offers lifetime coverage and includes a cash value component. However, these policies are significantly more expensive and often come with unnecessary complexities.

Types:

• Whole Life: Stable premiums and predictable cash value growth.
• Universal Life: Flexible premiums and coverage.
• Variable Life: Investment options with higher risks.

Pros:

• Lifetime protection.
• Cash value you can use for emergencies or future plans.

Cons:

• Higher premiums.
• Complex terms are sometimes designed to benefit the insurer more than the policyholder.

Key Insight: Permanent policies are frequently marketed as tools for “leaving a legacy” or “built-in savings,” but these benefits can be exaggerated. Administrative fees, surrender charges, and complex terms can significantly erode the value of these policies. Alternatives like trusts or direct investments are usually more effective and cost-efficient.

Hypothetical Cost Comparison: Over 30 years, a term policy at $25/month totals $9,000. A whole life policy at $200/month costs $72,000. That’s $63,000 you could have invested elsewhere.

Using Life Insurance as a Financial Tool

Life insurance is often marketed as a financial tool, but it’s important to approach this critically. While permanent policies with cash value might sound appealing, they’re not always the best choice for everyone. For instance, borrowing against the policy can lead to reduced death benefits if the loans are unpaid, and the fees involved often outweigh the benefits.

More Details on Permanent Policy Disadvantages

Administrative fees on permanent policies can eat into your cash value over time, limiting the growth of your investment. Additionally, surrender charges often apply if you cancel the policy within the first few years, significantly reducing the money you can recover. These hidden costs make permanent policies less appealing for many individuals.

Alternatives for Estate Planning

Instead of relying on permanent life insurance for estate planning, consider setting up a trust. Trusts offer greater flexibility, lower costs, and more control over how your assets are distributed compared to permanent policies. Diversified investments can also provide tax-efficient ways to grow and transfer wealth.

Common Mistakes to Avoid

• Trusting a Single Salesperson: Many insurance agents are incentivized to sell expensive policies. Always get multiple opinions and use online tools to compare options.
• Not Comparing Policies Online: Skipping comparison tools means missing out on better and more affordable options. Online tools let you evaluate fees, coverage, and terms side by side.
• Relying Solely on Employer Coverage: Employer-provided insurance is convenient but often insufficient and sometimes doesn’t transfer if you change jobs.
• Skipping Policy Reviews: Life events like marriage, children, or a new home mean your coverage needs may change. Regular reviews help keep things on track.

Solution: Set a calendar reminder to revisit your policy annually and use trusted resources to compare your options.

FAQs

How much coverage do I need? 

A common rule is 10–15 times your annual income, but your specific needs depend on factors like debts, living expenses, and future goals.

Are life insurance payouts taxable? 

Generally, no. Death benefits are typically tax-free, but certain exceptions apply.

Can I combine term and permanent insurance?

While some people mix policies, it’s often unnecessary. Relying on term insurance for temporary needs and exploring other financial tools for long-term goals is usually more cost-effective.

What should I look for when using online tools? 

Focus on comparing fees, coverage options, and the financial ratings of insurance companies. Online tools can help you find transparent policies that align with your needs and budget.

How do I adjust my policy after a major life event? 

If your financial goals or family situation changes, contact your insurer to review your options. You might increase coverage, switch to a term policy, or even reduce coverage if your needs decrease.

By staying informed and avoiding common pitfalls, you can make smarter choices about life insurance. Take control of the process by comparing policies online, revisiting your coverage needs regularly, and focusing on what truly aligns with your financial goals.