The Benefits of Life Insurance

In this article...
  • Explore the many benefits of having life insurance coverage. Find out why it's important to invest in insurance and get tips on how to choose the right plan.

If you're one of the 102 million Americans who doesn't have life insurance coverage or is underinsured, you may ask yourself if it's really that important to get a policy. The truth is that life insurance offers many benefits for you and your family. Understanding the benefits of life insurance can help you make the right choice regarding coverage.

The Benefits of Life Insurance

The benefits of life insurance include ensuring your family is financially secure and providing you peace of mind. Below are some other benefits to be aware of.

Tax-Free Wealth Transfer

When you pass away, your life insurance policy pays your beneficiaries a lump sum. The IRS doesn't consider this money a form of income, so your family members typically won't have to claim it on their tax returns. If you have a sizable estate and are subject to federal or state death taxes, your loved ones can use the lump sum life insurance payment to help pay for these liabilities.

Financial Stability for Your Family

With careful planning, you can ensure that your life insurance policy can replace income lost when you pass away so your family can maintain their standard of living. If you're retired, life insurance can make up for any reductions in Social Security and payments from other government programs that may occur. Your life insurance policy can also pay off your mortgage and other debts, freeing your family of the obligations.

Assistance With Final Expenses

The median cost of a funeral with cremation is about $6,000, according to the National Funeral Directors Association. With burial, median final expenses are around $8,000. Your life insurance policy can cover the funeral, viewing and burial or cremation so your family isn't worried about coming up with the money to pay for the arrangements while they grieve.

Protection From Expenses Related to Illnesses

Some policies have riders, which are endorsements that increase or adjust coverage under certain circumstances. If you choose a plan with an accelerated benefits rider, you may be able to access some of the death benefit while you're still alive if you meet specific criteria. Should a doctor diagnose you with a terminal illness or a condition that requires expensive treatment, such as cancer, you may be able to use the money to help cover what your private health insurance plan or Medicare doesn't.

Funds for Higher Education

Costs of education at four-year colleges and universities continue to rise. The Education Data Initiative reports that the average cost of college was $35,720 as of August 2021, and the cost increases approximately 6.8% each year. Life insurance can help your beneficiaries afford higher education after you pass away.

Potential for Supplemental Income

Some insurance policies build up a cash value that you can access to pay for unexpected and emergency expenses. During retirement, the cash value of life insurance policies can provide monthly income to supplement Social Security, your pension and retirement accounts.

Generating Wealth for Heirs

If you haven't managed to save much money or don't have any assets, life insurance can give you an inheritance to pass on to your family. Even if you don't have beneficiaries to pass wealth on to, you may wish to buy insurance to generate wealth to pass on to a charitable organization.

What Is the Main Reason for Buying Life Insurance?

A study conducted by LIMRA and Life Happens found that covering burial and final expenses was the number one reason why people buy life insurance. Help replacing lost wages and the transfer of wealth were also commonly given answers.

How Do I Choose a Life Insurance Plan?

There are two main options for life insurance coverage: term and whole. The Insurance Information Institute advises that term life is the better option when you only need life insurance for a specific period or require a large amount of insurance but can't afford big premium payments.

Whole life insurance can provide more stability because its premiums are often fixed, and your policy will remain in place for your entire lifespan. If you're hoping to receive the benefits of an insurance plan with a cash value, you'll need to choose a permanent policy.

How much insurance you'll need depends on:

  • How old you are
  • The ages of your spouse and children
  • The reasons why you need life insurance
  • What your current income is
  • What other sources of income are available for your family
  • Your total debt
  • Your total assets
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