As a financially responsible individual, it is essential to plan for the future and ensure the financial security of your loved ones. One aspect of this planning is considering whether adding life insurance with your savings is a good option. Both can provide financial protection, they serve different purposes and have varying benefits. In this article, we will discuss the pros and cons of each and why you might consider adding life insurance to your portfolio. If you would like White Swan can help you make sense of your life insurance needs.
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
What Is Life Insurance?
In a life insurance contract, the insurer agrees to pay a specified dollar amount to the beneficiary upon the insured person's death. This payment is referred to as the death benefit and is generally free from ordinary federal income tax, if there is a properly structured ownership and beneficiary arrangement, for the named beneficiary. Life insurance policies can be either temporary (term) or permanent.
Term life insurance covers a specific period of time or term, usually between 10 and 30 years. If the insured dies during this period, the beneficiary receives the death benefit. If the policy's level payment period expires and the insured is still alive, the coverage ends or may get too expensive to keep, and there is no payout. This is why term insurance is so affordable.
Permanent life insurance, on the other hand, typically provides coverage for the insured’s entire life. It is typically more expensive than term life insurance because it offers additional benefits such as potential cash value accumulation and riders (additional coverage that can cover other needs).
What is Savings?
Savings refers to the money that an individual sets aside for future use. Savings can be achieved through various means, such as putting money into a savings account, a retirement account, or investing in stocks and bonds. The primary purpose of savings is to provide financial security, save for large purchases (e.g. house, college, wedding, business etc.), and save for retirement.
Pros and Cons of Life Insurance
The primary advantage of life insurance is that it provides financial protection for your loved ones in case of your untimely death. This protection is imperative if you have dependents who rely on your income to meet their daily needs. Life insurance can also help cover funeral expenses, outstanding debts, and other end-of-life costs or it can be used to create your financial legacy.
However, life insurance can be confusing, time consuming, often required medical qualification, and premiums can be based on many factors such as age, health, and amount of coverage.
Pros and Cons of Savings
The primary advantage of savings is that it provides financial security and stability in the long term. Savings can be used to cover unexpected expenses like the loss of a job or to pay for a new roof, and can also be used to fund major purchases, such as a child's education or a down payment on a home.
However, savings may not be enough to cover all of your financial needs, especially if you have dependents who rely on your income or you have large debts such as a mortgage. Additionally, savings may be subject to market fluctuations and inflation, making it difficult to predict how much money you will have in the future. Savings in qualified investments may also have penalties and/or tax consequences if you need the money before a certain age, usually age 59.5, or in the first years of a contract. Savings vehicles can also be confusing, time consuming, and may fluctuate with age and income requirements/limits.
Which Is Right for You?
Most advisors would say you should have 3 to 6 months worth of essential expenses saved, as well as 10% - 15% of you pretax income going into some type of retirement account. If you have dependents, life insurance is a crucial investment. It will replace your income for your loved ones in case of your untimely death and help cover end-of-life costs or even create your financial legacy.
Savings provide financial security and stability in the long term and can be used to cover unexpected expenses or fund major purchases. it is a critical component of retirement planning.
In many cases, it is definitely beneficial to both accumulate savings and obtain life insurance. This strategy can provide additional financial protection and stability and ensure that your loved ones are taken care of in the event of your death.
Savings is important to achieve your long term goals, provide for short term cash in case of unexpected events or emergencies. Life insurance may be worth considering if your dependents are relying on your income, you want to take care of final expenses, or would like to create a financial legacy.
If you are interested in determining what life insurance solution may be best for you, get started with White Swan, a digital broker that helps you to protect your family and make sense of life insurance.