Is Life Insurance Worth It?

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A few months ago, I found myself in the middle of a one-on-one sales presentation for life insurance. The insurance company specialized in group insurance for union workers. And my father, who is a decades-long member of an electrical workers' union, referred me.

After sitting through the presentation, I realized that life insurance probably wasn't the right choice for me at the moment.

While insurance, alongside saving, spending, and investing, is one of the main pillars of financial well-being, insurance needs can vary dramatically depending on the person. It largely depends on your unique situation, needs, and set of circumstances. Interestingly, not having the right type or amount of insurance is a common financial blunder many folks make.

Wondering if life insurance is worth the cost? Let's walk through a few considerations to determine whether life insurance is a good fit for you:

Look at your employer benefits package

Before you shop around for life insurance, check to see if your employer offers life insurance coverage as part of your workplace benefits package. Depending on the plan, you might be able to receive either term or whole life insurance for free or a discounted group rate.

However, life insurance coverage from your employer usually maxes out at a certain number. For instance, it might cap at $200,000, or $500,000.

The cap could also be a multiplier of your salary. For instance, if you earn $50,000 at your job, and the life insurance policy has a cap of two times your salary, then your coverage amount maxes out at $100,000.

Understand the basics of life insurance

The main purpose of life insurance is to safeguard your loved ones should something happen to you. Most of the benefit is in the form of a payout to your loved ones after you pass or if you get into an accident.

A few ways you can use life insurance include:

Paying for funeral and burial expenses
Covering any outstanding debt (i.e., credit cards, car loans, mortgages, personal loans, student debt)
Creating another stream of income for your loved ones
Footing the bill for higher education expenses for your children

There are two main types of life insurance: Whole life insurance, and term life insurance. Whole life, which is also known as universal life or permanent life insurance, is designed to provide financial protection for your entire life. Term life insurance is insurance that provides financial protection for a set period and is typically anywhere from 10 to 30 years.

Note that with many life insurance accounts there's a tax benefit. In other words, it's an account that grows tax-free that you can access and borrow against over time.

Factor in your loved ones

Should something happen to you, how would that impact your spouse and dependents? A major factor to consider is how your loved ones will be impacted should you pass.

A few questions to ask yourself:

How much debt do you have? How would it be paid off?
How much do you anticipate your children and grandchildren's college expenses to be?
How long will you need life insurance for?
Do you have a mortgage? If so, what's the term?
Do your loved ones have other streams of income?
What duration of monthly payments do you feel comfortable with?
If you're married or in a domestic partnership, what assets does our partner own?

If you're single, life insurance might not be a good fit for you. But if you're unmarried and have dependents or aging parents who rely on you financially, you might want to consider getting a policy to provide them with a money cushion. Or it could be that you don't want someone to foot the bill to cover your funeral or burial expenses. In that case, it could also be a solid choice.

Within the realm of insurance talk, the general rule of thumb is that you should have at least seven to ten times the amount of your annual salary. So, if your yearly income is $60,000, you should aim to have a life insurance policy that covers $420,000 to $600,000.

Shop around

Now that you know the right questions to ask and if you think a life insurance policy is worth it for you, do your homework and rate shop by gathering a few quotes. When gathering your quotes, make sure the coverage amounts, deductibles and premiums are roughly the same. Here's what you'll want to check:

Coverage
Deductible
What the tax benefits are
If you can borrow money against the account
If you need any add-ons to your policy (AKA riders)
If there's flexibility in your premium
Cost of your premium (The cost hinges on a handful of factors: Your coverage, age, gender, medical history, hobbies, lifestyle, and your deductible. Generally, the younger and healthier you are, the less expensive your premium.)

When researching companies, make sure to also look up reviews and see what policyholders have to say about the insurer's customer service, and ease of filing claims.

Life insurance certainly isn't for everyone. In some cases, you might be better off squirreling away funds into a savings account and focusing on growing your retirement funds. However, it could be the right choice for some. It's important to understand whether it's right for you and the ins and outs of how it works.

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Jackie Lam

Jackie Lam is a personal finance writer whose work has appeared in Salon, Business Insider, and GOOD.