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Imagine this scenario: You are a young parent with two kids and a spouse who depends on your income. You have a mortgage, car payments, and other bills to pay every month. You are healthy and happy, and you don’t think much about the future.
But one day, you get into a car accident and die instantly.
Your family is devastated and shocked. They don’t know how to cope with the loss of their loved one. They also don’t know how to pay for your funeral, medical bills, and other expenses that you left behind.
What should they do in this situation?
Should they rely on their savings, if they have any?
Ask their relatives and friends for help?
Start a GoFundMe campaign and hope that strangers will donate enough money to cover their needs?
Or should they have a life insurance policy that would provide them with a lump sum of money that they can use for whatever they want?
This is not a hypothetical scenario. This is a reality for many families who lose a loved one unexpectedly and don’t have life insurance. According to a 2020 survey by LIMRA, only 54% of American adults have some form of life insurance, and 40% of those who have it say they don’t have enough.
ALSO READ: Is Your Life Insurance Safe from Being Taxed?
On the other hand, GoFundMe, a popular crowdfunding platform, has seen a surge in campaigns related to funeral and memorial costs in recent years. In 2019, GoFundMe reported that more than 125,000 such campaigns were created, raising over $330 million.
But is GoFundMe a good alternative for life insurance? Can you really count on the generosity of others to support your family in times of need? Or is it better to invest in a life insurance policy that can guarantee your family’s financial security and peace of mind?
In this article, we will compare the pros and cons of life insurance and GoFundMe, and help you decide which one is the best option for you and your family.
What is Life Insurance?
Life insurance is a contract between you and an insurance company, where you pay a monthly or annual premium in exchange for a death benefit that will be paid to your beneficiaries (usually your spouse, children, or other relatives) when you die.
The amount of the death benefit depends on the type and amount of coverage you choose, as well as your age, health, and lifestyle. The premium also varies depending on these factors, as well as the length and terms of the policy.
ALSO READ: Who Keeps the Cash Value When You Die?
There are two main types of life insurance: term and permanent. Term life insurance provides coverage for a specific period of time, usually 10, 20, or 30 years. If you die within the term, your beneficiaries will receive the full death benefit. If you outlive the term, the policy expires, and you get nothing.
Permanent life insurance provides coverage for your entire life, as long as you pay the premiums. It also has a cash value component that grows over time and can be accessed through loans or withdrawals. Permanent life insurance can be further divided into subtypes, such as whole, universal, and variable.
The main benefits of life insurance are:
- It can provide a large amount of money to your family when they need it the most, without any taxes or fees.
- It can cover the costs of your funeral, medical bills, debts, and other final expenses, as well as replace your income and maintain your family’s standard of living.
- It can give you and your family peace of mind, knowing that they will be taken care of financially in case of your death.
- It can also serve as a savings or investment tool, depending on the type of policy you choose.
What is GoFundMe?
GoFundMe is a crowdfunding platform that allows anyone to create a campaign and raise money for a personal or social cause. It can be used for various purposes, such as medical expenses, education, travel, charity, and more.
One of the most common uses of GoFundMe is to raise money for funeral and memorial costs. Many people who lose a loved one unexpectedly and don’t have life insurance resort to GoFundMe to ask for donations from their friends, family, and strangers.
The main benefits of GoFundMe are:
- It is easy and fast to set up a campaign and share it with your network and the public.
- It can help you raise some money to cover some of the expenses related to your loved one’s death, especially if you have a large and supportive community.
- It can also help you raise awareness and sympathy for your cause and connect with people who have gone through similar situations.
ALSO READ: What is Term Life Insurance? Understanding the Difference Between Term and Whole Life Insurance
Life Insurance vs GoFundMe: The Pros and Cons
While both life insurance and GoFundMe can provide some financial relief to your family in case of your death, they are not the same and have different advantages and disadvantages. Here are some of the main pros and cons of each option:
Life Insurance Pros
- Guaranteed and tax-free payout: Unlike GoFundMe, life insurance guarantees that your beneficiaries will receive the full amount of the death benefit that you agreed upon with the insurance company, regardless of how much you paid in premiums or how long you lived. The death benefit is also tax-free, which means that your family will get the entire amount without any deductions.
- Affordable and flexible: Contrary to popular belief, life insurance is not expensive, especially if you buy it when you are young and healthy. For example, a healthy 30-year-old can get a $500,000 term life policy for 20 years for as low as $20 per month. You can also choose the type, amount, and duration of coverage that suits your needs and budget and change or cancel your policy at any time.
- Additional benefits and features: Depending on the type of policy you choose, life insurance can also offer additional benefits and features, such as cash value, living benefits, riders, dividends, and more. These can enhance the value of your policy and provide you with more options and flexibility.
Life Insurance Cons
- Requires underwriting and commitment: Unlike GoFundMe, life insurance requires you to go through a process of underwriting, which involves answering questions about your health, lifestyle, and family history, and sometimes taking a medical exam. This can take some time and affect your eligibility and premium. Life insurance also requires you to commit to paying the premiums regularly, or else you risk losing your coverage and the money you invested.
- May not cover everything: While life insurance can provide a substantial amount of money to your family, it may not cover everything that they need or want. For example, if you have a large mortgage, student loans, or other debts, the death benefit may not be enough to pay them off. Or, if you have a terminal illness, the death benefit may not be enough to cover the medical expenses and the lost income. In these cases, you may need to supplement your life insurance with other sources of income or savings.
- May not be needed: While life insurance is a valuable tool for protecting your family, it may not be necessary for everyone. For example, if you are single, have no dependents, have enough savings, or have other assets that can cover your final expenses and debts, you may not need life insurance. Or, if you have a group life insurance policy through your employer, you may not need to buy an individual policy, unless you want more coverage or portability.
GoFundMe Pros
- No underwriting or commitment: Unlike life insurance, GoFundMe does not require you to go through any underwriting or commit to any payments. You can create a campaign and start raising money anytime, anywhere, without any restrictions or obligations. You can also end your campaign whenever you want, and keep whatever money you raised.
- No limit or purpose: Unlike life insurance, GoFundMe does not limit the amount of money you can raise or the purpose you can use it for. You can set your own goal and use the money for whatever you need or want, whether it is funeral costs, medical bills, debts, living expenses, or anything else.
- Emotional support and connection: Unlike life insurance, GoFundMe can also provide you with emotional support and connection, as you can share your story and receive messages and comments from your donors. You can also see who donated and how much, and thank them personally. This can help you cope with your loss and feel less alone.
GoFundMe Cons
- Not guaranteed or tax-free: Unlike life insurance, GoFundMe does not guarantee that you will raise the amount of money you need or want. You are relying on the generosity and availability of others, which can be unpredictable and inconsistent. You may also have to compete with thousands of other campaigns for attention and donations. GoFundMe also collects a percentage of all donations received, and you may have to pay taxes on the money you raise, depending on your situation and the IRS rules.
- Not enough or too late: While GoFundMe can help you raise some money to cover some of the expenses related to your loved one’s death, it may not be enough or too late. For example, if you need to pay for the funeral, medical bills, or other urgent costs, you may not have enough time to create a campaign and wait for the donations to come in. Or, if you need to replace your loved one’s income and support your family for the long term, you may not be able to raise enough money to do so.
- Privacy and security issues: Unlike life insurance, GoFundMe exposes your personal and financial information to the public, which can pose some privacy and security risks. For example, you may have to share sensitive details about your loved one’s death, health, or finances, which can be uncomfortable.
While both Life Insurance and GoFundMe offer financial support in case of death, they cater to different needs and come with their own advantages and disadvantages.
Life Insurance guarantees a tax-free payout to beneficiaries, providing peace of mind and long-term financial security. However, it requires underwriting and commitment to premiums. GoFundMe, on the other hand, is flexible with no requirements but relies on the generosity of others and raises uncertain amounts with potential tax implications.
Ultimately, the best choice depends on individual circumstances and financial goals. Those seeking predictable, guaranteed protection for loved ones may find life insurance advantageous, while those needing immediate but uncertain support in specific situations might benefit from GoFundMe.
