Reasons Why You Should Consider Buying Life Insurance

Life insurance is a contract between a life insurance provider and the policyholder to provide a benefit, or income, to an individual’s family if they die. Insurance pays out a given amount to dependents upon the insured person’s death, also referred to as the “key person.” When you buy life insurance, you can be sure your family’s financial situation will be resolved if something happens to you. This can provide your family with some peace of mind in the event of an unfortunate event. Buying life insurance is very straightforward, but it is also essential because it helps to protect your family against the many financial complications that can happen in a household. As a policyholder, you can choose the amount of coverage and terms of the range at different levels. According to LIMRA’s 2025 Insurance Barometer Study, 106 million Americans are uninsured or underinsured when it comes to life insurance. Here are some reasons why you should consider buying life insurance.

Replace Lost Income

Life insurance works to provide financial security to your family if you should die suddenly. It can help them replace lost income by paying off loans, outstanding bills, and debts or even bridge any shortfalls arising from their death. While it is not the ideal solution for everything, life insurance can provide a source of much-needed cash in numerous situations. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households, nearly 40% of Americans would struggle to cover an unexpected $400 expense — making income-replacement coverage especially vital. Life insurance can also be used as a form of financial planning if you are considering retiring or transitioning into retirement.

Build Cash Value

Life insurance policies can be designed to build cash value over time. For example, keep your life insurance policy for a long time or even for the entirety of your life. If so, you can invest your premiums into an investment account. You can then use that money to cover any expenses later in life. Whole life and universal life policies, offered by carriers such as New York Life and MassMutual, typically guarantee a minimum crediting rate — often around 2%–4% annually — on the cash value component. This is one way people can receive financial benefits regarding life insurance policies. The cash value grows on a tax-deferred basis, which the IRS treats favorably under current tax code provisions as outlined by IRS Publication 554.

Cover Burial Expenses

Life insurance can also help cover burial expenses. Many life insurance policies include cash value that can cover funeral expenses such as a coffin, casket, headstone, and viewing services. According to the National Funeral Directors Association, the median cost of a funeral with viewing and burial reached $8,300 as of their most recent survey, with costs in major metropolitan areas frequently exceeding $12,000. This is beneficial because it will help your family pay for any funeral expenses that can’t be covered by other means. It gives your family the ability to focus on the mourning process and not waste any time trying to find ways to cover the expenses.

College Planning

The insurance can also be used to help your children pay for college. More specifically, some life insurance policies have a cash value that can be borrowed against your child to help them pay for their education. According to the National Center for Education Statistics, the average annual cost of attending a four-year college in the United States — including tuition, fees, and room and board — now exceeds $28,000 per year at public institutions and $58,000 per year at private institutions. This is an excellent way to help your children start and manage their financial planning early. Unlike withdrawals from a 529 plan, policy loans from a permanent life insurance policy do not count as income on the FAFSA, which can be an important strategic consideration. It gives them a head start and encourages them to take advantage of any opportunity they may have later in life.

Diversify Investments

Life insurance can diversify your investment portfolio. If you have several stocks and bonds you have invested in, you can use the money from life insurance policies to make it so that you can hold more securities. Variable universal life (VUL) policies, for example, allow policyholders to allocate cash value among sub-accounts that may include equity funds, bond funds, and money market options — similar to what you might find through providers like Prudential or Allianz Life. The policyholders receive dividend payments from the insurer, which can then be redirected to other investments to diversify their portfolio. It allows you to purchase more securities, providing you with a consistent and stable source of income.

Business Planning

If you own a business and you want to pass it on to the next generation, life insurance is a good way for you to continue the business through inheritance. With life insurance, you can transfer your business or estate ownership to your family and then have them continue with your business. The U.S. Small Business Administration recommends that business owners use life insurance to fund buy-sell agreements, which are legally binding contracts that determine what happens to a business partner’s share if they die or become incapacitated. It allows them the flexibility to ensure that they can pay off any outstanding loans on their own. This helps them to be able to make the transition from carrying on their business to passing it on.

Estate Taxes

A life insurance policy can be used to help minimize estate taxes. If your lifetime estate tax exemption is included in the cash value of a life insurance policy, it should be fine to sell the procedure and have the proceeds used to cover estate taxes. As of 2026, the federal estate tax exemption is $13.99 million per individual ($27.98 million for married couples) according to the IRS Estate Tax guidelines. High-net-worth individuals often place life insurance inside an Irrevocable Life Insurance Trust (ILIT) to remove the death benefit from their taxable estate entirely. It ensures that your family won’t have to pay out of pocket for any estate taxes that may occur after you die.

Coverage is Affordable

The insurance is affordable in that the premium payments are short-term and the coverage is long term which means that it will continue to pay itself off over time. You can choose the premiums you want to pay, for how long, and at what level of coverage. According to Policygenius’s 2025 Life Insurance Rate Analysis, a healthy non-smoking 30-year-old can secure a $500,000, 20-year term policy for as little as $25–$30 per month — less than the cost of a streaming subscription bundle. You can customize the policy to include all your needs, and you will never have to bother with your family when paying or with any insurance coverage. There is no reason that you should be forced to pay high life insurance premiums if the coverage, protection, and service that you need are covered.

Peace of Mind

If you are worried about any incident that may happen to your family in the future, a life insurance policy can help to provide security for your family and peace of mind. It helps to reduce your stress and worry about any possible financial difficulties in the future. Research published by the National Institutes of Health (NIH) has found that financial stress is among the leading contributors to anxiety and sleep disorders in American adults, with 72% of adults reporting that money concerns negatively affect their mental health. If you cannot be there because of an accident or other unforeseen event, life insurance can provide some financial assistance for any bills after this incident. It assures your family of financial support if you die suddenly.

Pay Off Debt

If you have any outstanding debts you might be worried about, life insurance can be an excellent way to help pay off your debts. The cash value of a life insurance policy built up over time can be used to help you pay off any outstanding student loans or car payments. According to Experian’s 2025 Consumer Debt Study, the average American carries $104,215 in total debt, including mortgages, auto loans, student loans, and credit card balances. It may be a way to help you pay down any credit card accounts or other loans that may have been taken out in the past. It gives you an advantage in that you will not have to pay any bills or pay interest on them. It is easy to make the situation right with your debts and help prevent future stress.

Life insurance provides much-needed protection to your family during your sudden death. Having a policy set up to provide benefits without dealing with the different paperwork and red tape associated with obtaining life insurance shows that life insurance is a valuable tool for winning the battle against financial adversity. Most people already know the value of life insurance and have policies to help support their families in the event of their death. Setting up another coverage on a new policy will only add value and provide peace of mind, which can make all the difference in your family’s life.

Frequently Asked Questions

What is life insurance and how does it work?

Life insurance is a legally binding contract between a policyholder and an insurance company in which the insurer agrees to pay a specified death benefit to named beneficiaries upon the insured’s death, in exchange for regular premium payments. The policyholder names one or more beneficiaries who receive the payout — typically income-tax-free under IRS Section 101(a) — which can be used for any purpose, including replacing lost income, paying off a mortgage, covering funeral costs, or funding a child’s education.

How much life insurance coverage do I actually need?

A commonly used rule of thumb recommended by financial planners, including those at Fidelity, is to carry coverage equal to 10–12 times your annual income. However, your actual needs depend on factors such as outstanding debts (mortgage, student loans, car payments), the number of dependents, anticipated future expenses like college tuition, and any existing savings or assets. A Certified Financial Planner (CFP) can help you run a detailed needs analysis.

What is the difference between term life and whole life insurance?

Term life insurance provides coverage for a fixed period — typically 10, 20, or 30 years — and pays a death benefit only if the insured dies during the term. It is generally the most affordable option. Whole life insurance provides lifetime coverage and includes a cash value component that grows at a guaranteed rate, often between 2% and 4% annually, according to carriers such as New York Life. Whole life premiums are significantly higher but offer permanent protection and an asset-building feature.

Is life insurance worth it if I am young and healthy?

Yes — being young and healthy is actually the best time to buy life insurance because premiums are at their lowest. According to Policygenius’s 2025 rate data, a healthy 25-year-old non-smoker can secure a $500,000, 20-year term policy for approximately $18–$22 per month, compared to $60–$100 per month or more for the same policy purchased at age 45. Locking in a low rate while young and in good health can save tens of thousands of dollars over the life of the policy.

Can life insurance be used as an investment?

Permanent life insurance policies — including whole life, universal life, and variable universal life — accumulate a tax-deferred cash value that functions similarly to an investment account. Policyholders can borrow against this cash value or make withdrawals for any purpose. Variable universal life (VUL) policies, offered by carriers like Prudential, allow cash value to be invested in market-linked sub-accounts. However, the CFPB and independent financial advisors generally caution that for most people, buying a less expensive term policy and investing the difference in a low-cost index fund or 401(k) may generate stronger long-term returns.

Does life insurance cover suicide or accidental death?

Most life insurance policies include a suicide clause that excludes coverage if the insured dies by suicide within the first one or two years of the policy — after that period, suicide is generally covered. Accidental death is typically covered by standard life insurance policies; some insurers also offer an Accidental Death and Dismemberment (AD&D) rider that pays an additional benefit if death or serious injury results from an accident. Always review your policy’s exclusions carefully with your insurer or a licensed agent.

How does life insurance help with estate planning?

Life insurance is a powerful estate planning tool because the death benefit passes directly to named beneficiaries, generally bypassing the probate process entirely. High-net-worth individuals often use an Irrevocable Life Insurance Trust (ILIT) to keep the death benefit out of their taxable estate, helping minimize exposure to the federal estate tax. As of March 30, 2026, the federal estate tax exemption is $13.99 million per individual, per IRS estate tax guidelines. An estate attorney or CFP can help structure your policy for maximum tax efficiency.

What factors affect life insurance premium rates?

Insurers assess several key factors when calculating your premium, including your age, gender, health history, tobacco use, occupation, driving record, and the policy type and coverage amount you select. Applicants typically undergo a medical underwriting process that may include a paramedical exam. According to the Insurance Information Institute, smokers can pay two to three times more than non-smokers for the same coverage. Improving controllable health factors before applying — such as losing weight, quitting smoking, or managing blood pressure — can meaningfully reduce your premium.

Can I get life insurance if I have pre-existing health conditions?

Yes, though pre-existing conditions such as diabetes, heart disease, or a history of cancer will typically result in higher premiums or, in some cases, policy exclusions. Some insurers offer guaranteed issue life insurance — a type of policy that requires no medical exam and asks no health questions — for individuals who may not qualify for standard coverage. Guaranteed issue policies generally offer lower coverage amounts (often capped at $25,000) and are more expensive per dollar of coverage. Working with an independent broker who can shop multiple carriers is the best strategy for finding affordable coverage with a health condition.

Is life insurance taxable?

In most cases, no — life insurance death benefits paid to beneficiaries are income-tax-free under IRS Section 101(a). However, if the death benefit is included in the deceased’s taxable estate — for example, because the insured was also the policy owner — it may be subject to federal or state estate taxes. Cash value withdrawals above your policy’s cost basis are generally taxable as ordinary income, and policy loans that lapse with an outstanding balance can also trigger a tax event. Consult a tax professional or refer to IRS Publication 554 for complete guidance.