There are many misconceptions about life insurance, including that it’s expensive–especially if you take a permanent policy. Dig a little deeper, however, and it turns out life insurance costs aren’t as expensive as people believe them to be. How is that so, you ask? Allow us to explain with this guide about why life insurance is cheaper than you think.
Misconceptions about life insurance
If you’re new to the world of life insurance you might have some preconceived notions about what it entails and how much it costs. Don’t worry, though–you’re not alone. Most people think of life insurance coverage as something that provides a payout to your loved ones when you die. And while that may be true, it’s also so much more.
A permanent life insurance policy, for example, also carries a cash-value aspect and can be used as a form of investment account that you can tap into while you’re still alive. Plus, there’s a tax-free element. For these reasons, permanent life insurance is more expensive than a term policy (where you only have temporary coverage and once it expires you don’t get any benefits back).
But more expensive doesn’t always mean you end up paying more money. Sounds strange, right? In the long run, the life insurance costs for a perm policy provide more value over time than other coverage.
However, before we get into the finer details of life insurance costs and why it's not as expensive as you think, let's first look at the life insurance landscape to better understand how costing is calculated.
Different types of life insurance
There are three primary types of life insurance: term coverage, permanent coverage, and group life insurance.
Term
A term policy covers you for a set period, which is usually between 10 and 30 years. During that time frame, you pay into the policy each month. If the worst happened and you passed away (grim, we know), then your beneficiaries receive a death benefit thanks to the term policy.
If, however, you live through the coverage (yay), then that’s pretty much it. You don’t get any benefits, and if you want to renew the policy, your current age and health status are taken into account. That means it’s almost a certainty that your new premiums would be more expensive. There are no bells and whistles attached with term life insurance coverage, either. As a result, your initial policy is more affordable than if you took out a permanent policy. But you or your family don’t get any financial gain in the long term–unless you die. No one wants that, though, do they?
Group
Your employer typically provides group life insurance, and you might even be covered automatically from the minute your job begins. Group life insurance is the cheapest form of life insurance available, as your employer provides it directly, and you don't usually need to pay anything.
Sounds great, right? Well, it is, and it isn't. That's because the amount you're covered for varies and is usually capped at $50,000 or a percentage of your income. Plus, you will need to use your employer's preferred insurance company, and you lose your policy if you move jobs.
Permanent
A permanent policy comes with all the bells and whistles and is the most expensive type of life insurance. It’s so much more than a death benefit, and you can access it while you’re still alive.
For that reason, the cost of premiums is higher, and, on the face of it, permanent coverage seems more expensive. As a result, some people shy away from a perm life insurance policy, thinking it's more expensive without any significant advantages. However, that's not always the case...
Why permanent life insurance is more expensive
Cash value
Life insurance costs vary, and one of the reasons for perm policies costing more is because they carry a cash value. The cash-value element means your policy grows in value over time and accrues wealth that can be accessed later on in life. So while the coverage seems more expensive on the surface, you actually get access to a savings vehicle that can serve you well during retirement.
The cash-value aspect grows on top of the original coverage amount you purchased, with both the cash aspect and death benefit increasing at the same time. You're essentially paying into two different pots: one to grow wealth while you're still alive and another to leave to your beneficiaries when you pass.
Tax-free
Oh, and it also happens to be completely tax-free. Unlike other investment concepts–where you need to pay tax on your earnings–a permanent life insurance policy lets you withdraw funds without paying a dime to the IRS. But how do those tax-free earnings work? We promise it's not some sort of wizardry and is, in fact, relatively straightforward.
When you withdraw the funds you've accrued, you do so by loaning them from yourself with 0% interest. That means it's completely tax-free (you can't pay yourself tax), with you paying the loan back through your death benefit when you die. However, because you've also paid into the death benefit, it grows throughout your lifetime and you will still have money left over to leave to your loved ones even after you take out your cash value.
Critical care
Excuse us for getting all morbid for a minute, but it’s important to bring you all the facts and help you understand life insurance costs better. With a perm policy, you can even access your death benefit while you’re still alive if you fall seriously ill or injure yourself to the point where you can no longer work.
It has a built-in emergency fund that can protect you and your family against unforeseen circumstances and safeguard against losing income. A perm policy essentially covers all bases: when you’re alive and healthy, if you fall ill or get injured, and it protects your family after you pass.
Permanent life insurance actually provides more value
Yes, the initial costs of permanent life insurance are more expensive than a term policy–and if you're solely looking at the numbers on paper it may be hard to get past that. But you should look at the bigger picture, and a permanent policy provides more value in the long term. Therefore, you can get that initial investment back and more thanks to the tax-free cash-value element.
Not only that, but perm coverage also locks you into the initial premium. That means you're paying the same amount at 25 as you are 55, 65, or even 75. For example, if you took a term policy at 25, paid in for 25 years, and then renewed for another 20 years, you'd probably end up paying more than you would with a perm policy taken out at the same age.
In conclusion: life insurances costs
Getting a life insurance policy is definitely cheaper than you think when considering the long-term aspects of investing. Over time you can grow your wealth and access it completely tax-free while protecting you and your family in both life and death. So, yes, you need to pay a little bit more initially, but the long-term gains mean permanent life insurance offers more value than the other types of life insurance while also providing you with a safer and smarter way to invest in your future.