Is Life Insurance Bad?

Sean McGinn is an assistant director of Product Positioning in the Risk Products department at Northwestern Mutual.

Of course, we think life insurance is good. After all, we sell it! But we know that people sometimes question whether life insurance is worth the cost—or even whether it’s something they need.

Questions like these are natural. While life insurance can play a key role in protecting your family and even growing your wealth (with certain types of policies), it doesn’t exactly make for a fun “unboxing” video. In other words, it’s not the type of purchase that gives you instant gratification.

But a policy can give you peace of mind. Over time, it can become an asset that can play an important role in your financial plan.

With a decision this big, you want to spend some time and make an informed decision. Here, we’ll explain a little more about life insurance and when it makes sense.

Who needs life insurance the most?

A life insurance policy will pay a death benefit to your family if you die with the insurance in place. The type called “term life insurance” will eventually expire. But permanent or whole life policies will pay a death benefit no matter when you die (as long as you pay the required premiums).

Here are some common situations that make people want a life insurance policy.

You’re a parent or have family members who count on you for money

You might immediately think of your spouse or partner and children, but also think about anyone else you’re helping. Maybe you’re paying for a niece’s private school or letting her live with you. Maybe you’re caring for elderly parents. If you pass away, a life insurance death benefit can help your family members to maintain their lifestyle.

You have a mortgage or other long-term debts

Buying a home is a big step for many people because it typically means being responsible for a mortgage. Life insurance can help your loved ones keep making the mortgage payments if you pass away. Long-term debts like student loans can also be a good reason for life insurance. If you co-signed for someone's private student loan, you could be responsible for the payments if that person dies. You may want to get a policy insuring them with you as the beneficiary. If they pass away earlier than expected, you can use the death benefit to help pay off the loan—which could come due upon their death.

You own a business with a partner

Business partners have insurable interests in each other, meaning that they will suffer financially if the other person passes away. It’s not uncommon for business partners to have insurance on each other to protect the business from the financial burden of an unexpected death.

Does everyone need life insurance?

Life insurance does make sense for most people. But it’s not typically the kind of thing you wake up on a random Saturday and decide to buy. Typically, a major milestone causes people to think about it. This might be getting married, having children, buying a home or starting a new job or business. Big steps like these are good times to get a policy or review your current coverage and consider whether more coverage makes sense for you.

Types of life insurance

There are two main types of life insurance. While each type offers an immediate death benefit, they work in very different ways.

Term life insurance

Term life insurance provides a death benefit for a temporary term. A term policy can be an inexpensive way to get a large death benefit for a set period of time. Term policies last for only a certain number of years or until you reach a certain age.

Permanent life insurance

Permanent life insurance is named well because it’s permanent. As long as you pay the required premiums, a permanent life insurance policy is guaranteed to pay a death benefit. And it accumulates cash value, which becomes a source of funds you can access during your life. You can often get this money quickly and without tax consequences—but using it reduces your death benefit. Because of these lifelong benefits, a permanent policy is usually significantly more expensive than a term policy.

Some people get two policies to take advantage of each insurance type. It depends on their goals, budget and other considerations, so it’s helpful to talk with a financial advisor.

How much does life insurance cost?

The cost of a life insurance policy is based primarily on the amount of coverage you need, your age and your health at the time you get your policy. The type of policy also matters. Your financial advisor can get to know you, ask deep questions that uncover blind spots and opportunities, and then help you build a financial plan that leverages a range of financial options—including life insurance—to help you reach your goals.

Evolving life insurance over time 

While the life milestones mentioned above are times when people often add to their coverage, there are also times when it may make sense to reduce or evolve your coverage. As you get older, maybe you’ll pay off your mortgage. Your kids will move out and start supporting themselves.

If you have a large term policy, you may no longer need such a large death benefit later in life. But if you have permanent life insurance, it can help support other financial goals during your life. Your Northwestern Mutual financial advisor can work with you throughout your life to make sure you’ve got the right coverage—and that your plan evolves with you.