Life vs. Health Insurance: Choosing What to Buy

There’s a definite comfort in knowing that even if your health takes an unexpected turn, you and your family have a financial safety net. When money’s tight, though, paying for both a life insurance policy and healthcare coverage each month can get tricky. As expenses start to mount, it can be tempting to drop one or the other to make ends meet.

Each type of insurance, however, serves a completely different purpose and offers different coverage.

Key Takeaways

  • Young couples are often advised to obtain both health insurance and life insurance coverage.
  • Health insurance covers a portion of medical expenses and doctor's visits, while life insurance pays out a lump-sum death benefit upon premature death.
  • While healthy young adults often forgo health insurance, the Affordable Care Act has made it easier to obtain coverage, or to stay on a parent's plan.
  • In addition to health coverage, most individuals really do need life insurance once they have a family.
  • When you only buy the coverage you truly need, paying for health and life insurance simultaneously becomes a lot less daunting.

Life vs. Health Insurance

Life insurance pays out a lump sum to your beneficiaries in the case of your premature death. The idea is that the death benefit should be sufficient to replace future income loss, as well as cover expenses and obligations outstanding such as funeral costs, medical expenses, and other debts—or to fund college savings accounts or retirement years. This gives the family financial continuity so they do not struggle, despite the loss of you and your wage-earning capacity.

Health insurance, on the other hand, helps pay for medical expenses such as doctor's visits, hospital stays, medications, tests, and procedures. This helps ensure that people can afford medical care and stay healthy.

The reality is that a lot of people genuinely need both types of protection, especially if they have dependents. If that’s the case, the better idea is to limit coverage to what you truly need so you can afford both types of insurance.

Keep in mind that insurance needs can change dramatically during different life stages. What might seem essential for a parent with teen children might not be so important for a recent college graduate or a retiree.

Life vs. Health Insurance

Investopedia / Sabrina Jiang

The “Young Invincibles”

Prior to the 2014 rollout of the Affordable Care Act (ACA, signed into law in 2010),many 20- and 30-somethings chose to forgo health insurance altogether; roughly 30% of young adults under age 26 had no health insurance at all. And not without reason: These “young invincibles,” as some experts call them, have a much lower incidence of health problems than most segments of the population. Paying a premium for health insurance every month just seemed unnecessary to some. But with the ACA imposing a mandate on most Americans to have health coverage, that started to change.

The Tax Cuts and Jobs Act (TCJA) eliminated the mandate (or, more strictly speaking, the noncompliance penalty), starting in 2019. Still, once you consider the advantages of health care coverage, you might well want to have it.

One piece of good news for recent grads is that the ACA allows you to stay on your parent’s plan until the age of 26. That may buy you some time before taking out a policy of your own.

A few states, including New York, New Jersey, Florida, and Pennsylvania, even allow adult children to remain covered on their parents’ plan until the age of 30 or 31. Generally, they must be unmarried and have no dependents of their own.

If relying on your mom and/or dad’s policy isn’t an option and you’re under the age of 30, a relatively inexpensive catastrophic policy might be worth a look. You won’t be reimbursed for most doctor visits and other day-to-day health needs, but after you reach a certain deductible, you’ll have a safety net if you end up experiencing a major medical issue. For people with a nearly spotless health record, this minimal amount of insurance is often enough.

Considering a bump-up in your coverage by purchasing a  Bronze, Silver, Gold, or Platinum plan on your state’s healthcare exchange? It’s possible that you could get some help from the government. While you can choose any metallic level plan in the marketplace, your income must fall between 100 and 400% of the federal poverty level to qualify for the tax credit. For 2021, in order to be eligible for a subsidy, you must make below $51,040 for an individual, $68,960 for a couple, and $104,800 for a family of four. In each case, that number represents four times the federal poverty rate for 2020.

Through 2022, the American Rescue Plan Act eliminates an income cap that restricted who qualifies for ACA tax credits to help offset the cost of monthly insurance premiums, opening the door to people with incomes above 400% of the federal poverty level, who were previously ineligible for the tax credits. It also limits the maximum amount anyone must pay for marketplace health insurance to 8.5% of income vs. 9.83%, and boosts subsidies to lower-income consumers—those with incomes between 100% and 400% of the poverty level.

If you happen to live in a state that chose to expand Medicaid as a result of the ACA, you might even be able to get coverage through that program. If you just graduated and are working at the local coffee shop or grocery store to make ends meet, it’s possible that you could qualify. 

Life Insurance for Under-30s

While you may not have much choice when it comes to obtaining health coverage, life insurance is a different matter. If you don’t have any kids yet, you may not need it.

There are a few exceptions. If you’re financially supporting your parents or grandparents, you’ll want to take out a policy that’s large enough to handle their needs. Or you might want a small policy that will cover your funeral expenses if the unforeseen should occur. As long as you stick with a no-frills term policy, this type of coverage usually isn’t all that expensive for someone in his or her 20s or 30s.

Raising a Family

Once kids come along (or even just a spouse), health insurance takes on a new level of importance. If your employer offers a health plan, that’s usually—though not always—going to be less expensive than shopping on an exchange. At work, the company is usually subsidizing a big part of your health premium; in the “individual” insurance market, you’re paying the full bill, less any tax credits or subsidies for which you may qualify.

But you may not need the most expensive policy your company offers. During your employer’s open enrollment period, take a look at the premium for each plan. Then make a ballpark estimate of how much you’d have to pay out-of-pocket for things like emergency services, lab work, and prescription drugs under each option. You may find that the top-tier plan isn’t worth the extra premium. 

The same principle applies to families who aren’t covered at work and instead buy on the individual market. Unless you expect to incur major medical expenses, a “Silver” plan can sometimes give you enough coverage for less than a “Gold” or “Platinum” one.

Life Insurance Needs

In addition to health coverage, most individuals really do need life insurance once they have a family. But it need not cost you a bundle to give your loved ones a financial safety net. First, consider getting a term policy, which only stays in force for a specific number of years. These tend to be a lot cheaper than permanent policies like whole life and universal life.

Another way to keep the cost down is to buy only as much life insurance as you need. There are a couple of ways to figure this out. One is to multiply your salary by a certain amount—10 times your annual wage is one rule of thumb—and use that to determine the policy’s face value.

A different and perhaps more useful approach is to tally up all the expenses your spouse would incur if something happened to you. Think childcare fees, grocery bills, mortgage and car payments, tuition, and so on. Then subtract whatever you have in savings and investment accounts. Your policy should cover the difference.

The fact is, any insurance is better than no insurance if you have dependents. So if you’re feeling pinched from a financial standpoint, buy whatever you can afford. 

Empty Nesters

It’s one of those pesky facts of life: The older you get, the more likely you are to experience health complications. Thus, middle-age probably isn’t the time to start skimping on your medical insurance.

But there’s at least one financial benefit to getting older. Once your kids reach adulthood and financial independence, you might be able to start dialing back on life insurance. That doesn't necessarily mean dropping your coverage altogether. If you still have a mortgage to pay off—or if you’re living on a pension that doesn't pay a survivor benefit—you’ll still want at least some protection.

If your existing term policy is coming to an end, one option is to take out a smaller policy that provides a safety net during your empty nest period. Or if your current term coverage includes a conversion feature, you could turn a portion of it into a permanent life policy.

The advantage of convertibility is that you don’t have to go through medical underwriting all over again, which becomes trickier as you get older and inevitably have more health issues. Just be aware that you only have a certain number of years when you can take advantage of this feature, so it’s worth reviewing your carrier’s terms and conditions.

What Is the Difference Between Life and Health Insurance?

Health insurance is designed to pay for medical treatment, drugs, and preventative check-ups for you and others covered under your plan. Life insurance provides a cash sum to your loved ones if you die during the length of the policy.

Do You Need Life Insurance After You Retire?

There's no one-size-fits-all answer. If, after you retire, you don’t have issues paying bills or making ends meet, and your children are all self-sufficient, you likely don’t need life insurance. 

If you still have a lot of outstanding debt obligations (like a mortgage) or have children or a spouse that is dependent on you, keeping life insurance is a good idea. If you have considerable assets—enough to trigger estate taxes—life insurance placed in an irrevocable trust might be a way to get money out of your estate.

Do I Need Health Insurance If I Am Young?

Yes, it's generally a good idea to have some health insurance even if you're young and relatively healthy—at the very least, for catastrophic events. Accidents and severe illnesses can strike anyone, and even a brief emergency room visit or an outpatient surgical procedure can cost hundreds or thousands of dollars. Without health coverage, you're responsible for all of those expenses. While it's becoming rarer, some providers and ERs will turn you away if you're uninsured.

The Bottom Line

When you only buy the coverage you truly need, paying for health and life insurance simultaneously becomes a lot less daunting. Those of you age 30 and younger who don't suffer from chronic illness may be able to get by without the latter. But for people with dependents, these are two needs you really can’t avoid.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. House of Representatives. "Compilation of Patient Protection and Affordable Care Act."

  2. Centers for Medicare and Medicaid Services. "Young Adults and the Affordable Care Act: Protecting Young Adults and Eliminating Burdens on Families and Businesses."

  3. "No Health Insurance? See If You'll Owe a Fee."

  4. Congressional Research Service. "The Individual Mandate for Health Insurance Coverage: In Brief," Page 1.

  5. National Conference of State Legislatures. "Dependent Health Coverage and Age for Healthcare Benefits."

  6. "Obamacare’s ‘Subsidy Cliff’ Eliminated for 2021 and 2022."

  7. "H.R.1319 – American Rescue Plan Act of 2021."