Investing for the future is a hallmark of the American Dream, and figuring out the life insurance vs. savings account debate is a pretty good start. While both options present unique benefits, it’s essential to understand the differences and which option may suit your needs better.
A savings account better suits the young professional worker who does not have dependents and is just starting to build up savings for a rainy day. But as your career progresses and you start a family, the best way to financially protect your dependents in case of your untimely death is to invest in life insurance.
This post will cover the debate between life insurance and savings accounts. If you’ve been wondering if you need life insurance when you already have savings, this article is for you.
Understanding Savings Accounts and Life Insurance
The peace of mind of a secure tomorrow is an essential part of being happy today, and savings accounts and life insurance are two valuable tools in achieving this.
Explanation of Savings Accounts and Their Benefits
Savings accounts are financial instruments that allow individuals to deposit money and earn interest over time. They offer a safe place to store money while allowing easy withdrawals when needed.
The point of saving in banks or other financial custodians is safety and accessibility. Though savings accounts are investments, they’re more like storage than growth tools. These financial tools attract some interest because the bank uses your money to lend to others.
The little interest helps to offset the loss of value that comes with inflation. As a rule of thumb, having at least six month’s worth of living expenses in liquid assets is an excellent idea.
Savings accounts vary in fees, with some charging monthly maintenance fees or requiring minimum balances. However, most savings accounts offer the benefit of compounding interest, meaning you earn interest on both your initial deposit and accumulated interest over time.
The Different Types of Savings Accounts Available
1. Traditional Savings Accounts
Most workers go for the traditional bank savings accounts because it’s been the norm for centuries. They are pretty common as they’re offered by multiple financial institutions like banks and credit unions.
These accounts typically offer low-interest rates but have lower minimum balance requirements.
2. High-Yield Savings Accounts
Professionals who like these accounts target their higher interests, compared to traditional savings accounts, though they come with conditions. You have to maintain a higher minimum balance and are limited to how many times you can withdraw periodically.
3. Certificates of Deposits (CDs)
These are time-based savings accounts that offer higher interest rates, bargain investors get for locking up their money for fixed durations stretching between three months to five years. Withdrawing funds before the CD’s maturity date may result in penalties.
4. Money Market Accounts (MMA)
MMA combines features of checking and savings accounts. You stand to enjoy higher interest rates than saving with traditional bank accounts. You also get to write checks and use your debit card. However, money market accounts often require a minimum balance to open and maintain the account.
The Definition and Purpose of Life Insurance
If you have loved ones, you want them to be okay whether you’re around or gone. How do you continue taking care of your dependents when you’re gone? Ultimately, that’s the primary goal of life insurance: to financially cushion your loved ones in case something happens to you.
Life insurance is a contract; the focus of the contract is on the insurance company providing a financial safety net for dependents in case of your demise. Basically, you pay premiums, and in return, the insurance company promises to pay out a lump sum to your beneficiaries upon your demise.
The Different Types of Life Insurance Policies
Workers are spoiled for choice when choosing life insurance policies, which vary depending on the:
- Duration of coverage.
- Premium payments.
- Benefits paid out to beneficiaries.
- Cash value accumulation.
- Coverage flexibility.
- Available investment options.
- Riders or additional features added to the policy.
Some of these policies include:
1. Term Life Insurance
This insurance only covers your life for a set period of years, which most companies offer within incremental five years, like five years, ten years, 15 years, 20 years, and so on. The beneficiaries you specify receive a death benefit lump sum if you pass away within the term.
However, if you outlive the policy term, your beneficiaries do not receive anything. You may choose to renew your plan but at an increased premium rate.
2. Whole Life Insurance
This policy, also known as permanent life insurance, covers your entire life. What’s sweet about this deal is how it comes with a cash value accumulation component as it earns interest over the years.
This account grows tax-free as governments consider it a form of retirement savings. Unlike term insurance, this one doesn’t have an expiration date. Your beneficiaries get the lump sum payout upon your demise.
3. Universal Life Insurance
Though unstructured like whole life insurance, this type offers policyholders more flexibility concerning premiums and death benefits payout. It lets you change your premium payments and alter your death benefit amount.
Do I Need Life Insurance if I Have Savings?
You’ve probably asked yourself this question. Before we answer it, kindly refresh yourself on how to convince a loved one to buy life insurance.
You need life insurance even if you have savings. Will there be situations where a savings account is better than life insurance? Sure, but these are few and far between, especially if you do not have dependents. So, why should you consider getting life insurance, even if you have savings?
Life insurance helps out your dependents more significantly when you pass away. Life is unpredictable, and you may die before your savings mature. What happens to your loved ones when this unforeseen event occurs?
Picture this. You start paying $200 monthly premiums for your life insurance today. The same day, a colleague decided to save the $200 monthly in his bank account. What would happen in the sad case that both you and the colleague suffered a tragic work-related accident just three years later?
The cash sum of the death benefit your family would receive would be much more than what your colleague’s saving account had accumulated. Moreover, the payout to your dependents would be tax-free, but the savings account would be liable for taxation.
So, life insurance offers extended protection against unforeseen circumstances. In fact, it provides more than just financial support to your dependents. It also offers peace of mind that they will have some form of security after you are gone.
Your life insurance death benefits could help your dependents cover funeral costs and your outstanding debts or even ensure your dependents are not left struggling to make ends meet.
Some policies also offer cash value, which accumulates over time and can be accessed during your lifetime. This cash value can provide additional financial support to you and your family in times of need.
Final Thoughts on Life Insurance vs. Savings Account
While having a savings account is definitely a wise financial decision, it should not be seen as a substitute for life insurance. Life insurance products offer the protection and security of your loved ones in case of your untimely death.
It would help if you also considered the tax implications. Most states generally do not tax life insurance death benefits, whereas savings account interest may be subject to capital gains taxes.
Any professional owes it to their family to consider purchasing a life insurance policy. And, if you are really thinking of getting one now, here’s the next question to ask: is it wise to buy life insurance online?