You’ve heard about life insurance. Your boyfriend or your parents might have suggested you get it. Maybe you’ve even shopped for coverage or have some life insurance through work. But do you really understand what life insurance is and what it can accomplish for you and your family?
If you’re asking, “Why should I acquire life insurance?” think about the individuals who depend on you. Life insurance is a way to provide for and protect them financially, making it a vital (and often surprisingly affordable) aspect of a financial strategy.
Reaching your goals at every stage of life comes with some financial readiness. Think about your biggest financial aspirations, like buying a house, sending your kids to college, or budgeting for retirement.
As you and your family save for these milestones, life insurance can provide protection against the unanticipated. If you were to die unexpectedly, a policy would provide your family with a tax-free cash payout that they could spend on anything they needed. That money can assist with covering daily expenses, reducing financial burdens, and paying for those goals you’ve worked so hard together to achieve.
Despite all the good it may do for your loved ones if they need it, life insurance is often misunderstood. According to the 2021 annual report from industry association LIMRA, approximately 65 percent of uninsured people believe that not knowing how much insurance they need or what type to buy has kept them from getting coverage. This lack of confidence helps to explain why only 52% of adults purchase any type of life insurance.
Don’t let a lack of understanding hold you back from safeguarding your family’s financial future. Understanding what life insurance is — and why it matters — is the key to safeguarding your family.
What is life insurance and how does it work
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13 reasons why life insurance is important
Whether you’re married with kids, or have a partner or other family member who depends on you financially, obtaining life insurance can be vital. Life insurance delivers money, or what’s known as a death benefit, to your selected beneficiary when you die. It can help provide your loved ones with access to money when they need it.
Understanding life insurance can help you plan for your family’s long-term financial needs. Here are five reasons why life insurance is vital.
1. It Can Help to Financially Protect Your Family
Life insurance is supposed to assist protect your family’s financial future. Perhaps if you have funds, it’s unlikely that it would be enough to meet your family’s costs for several years or even decades if something occurs to you unexpectedly. Typically, there are three forms of life insurance to consider: term life, whole life or universal life.
Term life insurance
This sort of life insurance covers coverage for a specific amount of time—often 10, 15, 20, or 30 years. Coverage terminates at the conclusion of the term. However, most term life insurance policies also provide optional riders that could allow you to renew or convert your policy.
Whole Life Insurance
This sort of life insurance doesn’t expire as long as you continue to pay the premiums. It also offers a monetary value component that has growth potential. You can also borrow from the cash value, but loans or withdrawals may incur an income tax penalty, lower the cash value and death benefit, and cause the policy to lapse. Loans will also accrue interest. The policy may be issued as a Modified Endowment Contract (MEC) for tax purposes. Any withdrawals or surrenders could result in a taxable event.
Universal Life Insurance
This type of life insurance is comparable to whole life because it likewise does not expire as long as you continue to pay the premium, and it also has a cash value component. With a universal life policy, you often have the ability to change the premium and death benefit. However, there must be adequate cash value in the policy to meet monthly charges if a smaller premium is paid than the amount set at issue or if a premium payment is skipped. Additional premium payments may need to be made to maintain the policy in force. Increases in coverage are also subject to underwriting.
2. It Can Replace Lost Income
Whether you have a 9-to-5, are self-employed, or operate a small business, your income might cover a portion, or even all, of your family’s daily needs.
Housing, food, utilities, clothing, auto maintenance, and health insurance premiums are likely all part of your monthly budget, and even without your income, your family will still need to fund these expenses. The death benefit from a life insurance policy can help provide the funds your family may need to help meet these bills. When examining your options, you may want to think about utilizing a life insurance calculator to help you decide how much life insurance you may need.
3. It Can Help Your Loved Ones Pay Off Debt
Certain sorts of debt don’t go away after you die, which means your loved ones may have to spend money from your estate or sell off other assets to cover it. This could leave less money to pay for expenses.
Life insurance can help your loved ones pay for whatever debt you leave behind, including credit card debt, company debt, personal and/or educational debts, and mortgage debt. At a time when your loved ones are already suffering with your loss, life insurance can help lessen some of the financial problems they may experience following your passing.
4. It Can Cover Funeral Expenses
Certain sorts of debt don’t go away after you die, which means your loved ones may have to spend money from your estate or sell off other assets to cover it. This could leave less money to pay for expenses.
Life insurance can help your loved ones pay for whatever debt you leave behind, including credit card debt, company debt, personal and/or educational debts, and mortgage debt. At a time when your loved ones are already suffering with your loss, life insurance can help lessen some of the financial problems they may experience following your passing.
5. To Ease Stress For Your Loved Ones
One of the most important things to understand about life insurance is that it’s not for you, it’s for them. Think about what would happen to your family if you went away tomorrow, or next month, or next year. What would your family need to do to stay afloat financially? One in four respondents says they would feel the financial impact within a month if the principal salary earner in their home died, according to the 2020 LIMRA study.
When you acquire life insurance, you pick a coverage amount, which can range from a few thousand dollars to $2 million. If you die while the policy is still active, your beneficiary receives that amount in cash. Your beneficiary is a person you designate to receive the payout, generally your partner, your adult children, or another family member. You can designate numerous beneficiaries if you desire, and you can amend your beneficiaries as needed if your situation changes. Life insurance can give both you and your beneficiary piece of mind that money is there to address some of the usual demands below.
6. To Pay Daily Bills
One of the main reasons people acquire life insurance is to help their family meet daily expenses, including groceries, utilities, and car payments. According to the 2021 LIMRA poll, 63% of consumers say they bought life insurance to replace their income.
Think about all of the things your income covers. If your paycheck suddenly wasn’t there, your family would need an additional source of income to pay for all of them. Since life insurance is often paid out much more rapidly than settling an estate, which can take months after death to complete, it can also provide help faster, so your family isn’t burdened financially.
7. To Protect Your Business
Almost half (47.5 percent ) of all Americans are employed by small businesses, and there are about 30 million small company owners in the United States. Building a business is one of the most successful ways to build money for your family that lasts beyond your lifetime.
If you’ve worked hard to develop a business of your own, life insurance can assist keep it viable if you die unexpectedly. The payout from a policy provides a cash infusion to assist cover payroll, inventory, and any immediate financial demands, and it’s cheaper than having to borrow from a bank or credit union.
If you have a business partner, you might need to get a life insurance policy that includes them as the beneficiary as part of your business arrangement and vice versa. This agreement can provide greater financial security to both of your families. You may also be entitled for tax benefits if you buy a policy for business purposes, so chat to your accountant if you plan to take this route.
8. It Can Help to Pay for Future Education Expenses
If you have children, life insurance can help your family pay for future childcare and education expenses, especially for college. Even if you’ve already started contributing to a 529 college savings plan, the death benefit from a life insurance policy can give additional money to assist finance your children’s education if you were to die.
9. To Secure Your Retirement
You think about it for decades and put money aside to make it happen. Retirement is one of the greatest and longest-term financial goals for families. If you die with a few years left to go before retirement, life insurance can help make sure that your partner gets to enjoy the life you dreamed of together. That’s why nearly three in 10 Americans acquire life insurance to augment their retirement, according to 2021 LIMRA research.
Beyond the security of a financial payout if you die, there are a few more ways that life insurance might help fund retirement:
Life insurance riders might give a payout if you’re still living and your retirement takes an unexpected turn. For example, the accelerated benefit rider pays a portion of your benefit early if you are diagnosed with a terminal illness. This can make your last few years more comfortable and less financially burdensome on your family.
If you have a permanent life insurance policy, it also generates cash value that you can access if needed during your retirement. Keep in mind that borrowing from your policy without repaying the money can diminish your death benefit later.
10. To Pay for Your Child’s Education
The percentage of people attending college is going up. In fact, approximately 39 percent of millennials now hold a college degree, compared with 29 percent of Gen Xers and roughly 25 percent of baby boomers. The average cost of college tuition and fees is growing, too. Today, the annual cost of tuition and fees to attend college is roughly $41,000 for private universities, $27,000 for out-of-state students at state schools, and about $11,000 for state residents at public colleges. Keep in mind that accommodation and board, as well as other fees, can push these amounts higher.
If college will be part of your child’s future, having a plan to pay for it is crucial. And even if your child’s plans don’t include college, they could wish to learn a specialized trade or go through another program that needs support.
With life insurance, you have a financial resource to help preserve those ambitions. When estimating your coverage amount, consider how many kids you have and the projected cost of schooling for each one. You may need to add in additional funds depending on the sort of school.
11. To Provide a Source of Cash During Your Lifetime
As indicated above, permanent life insurance policies can provide financial support during your lifetime as well as after your death. Permanent life insurance lasts your whole lifetime as long as you pay your premiums, and it grows in cash value over time. You can borrow from it tax-free or use it as security for a loan. That money can help you achieve major and minor financial goals throughout your life, such as paying for college tuition, home improvements, or a significant trip. It’s yours to do with what you please.
12. To Leave an Inheritance
Want to leave something behind for your kids or grandkids to help them attain their own financial goals? Life insurance is one of the easiest and most economical ways to do it. You can also leave your inheritance to an organization, such as a charity. Depending on how you arrange it, there can be some tax advantages involved as well. Talk to an accountant to make sure you optimize your tax benefits.
13. To Give Your Family More Control Over Their Financial Future
There are many of good reasons to acquire life insurance, but it’s also important to remember that it comes with no strings attached. Your family can use the money for anything they need, and the payout is normally tax-free. Every family’s requirements are distinct, and so are their dreams. Ultimately, life insurance provides options — the types of options you would have worked to give your loved ones if you were there. If you’re not sure how much you need or what your family could use it for, start by determining a coverage amount with our term life insurance calculator.
Bottom Line :
Life insurance can provide your family with a tax-free cash payout that they could spend on anything they needed. Life insurance delivers money, or what’s known as a death benefit, to your selected beneficiary when you die. Despite all the good it may do for your family if they need it, life insurance is often misunderstood. Only 52% of adults purchase any type of life insurance. Term life insurance covers coverage for a specific amount of time, often 10, 15, 20, or 30 years.
Whole life insurance offers a monetary value component that has growth potential. Universal life insurance is comparable to whole life but doesn’t expire as long as you continue to pay the premiums. Life insurance can cover a portion, or even all, of your family’s daily needs. A life insurance calculator can help you decide how much life insurance you may need. Even without your income, your family will still need to fund these expenses.
Life insurance can help your family pay for whatever debt you leave behind, including credit card debt, company and/or educational debts, and mortgage debt. When you acquire life insurance, you pick a coverage amount, which can range from a few thousand dollars to $2 million. Your beneficiary is a person you designate to receive the payout, generally your partner, your adult children, or another family member. Life insurance can give both you and your beneficiary piece of mind that money is there to address some of the usual demands below. If you have children, life insurance can help your family pay for future childcare and education expenses.
Nearly three in 10 Americans acquire life insurance to augment their retirement, according to 2021 LIMRA research. Life insurance riders might give a payout if you’re still living and your retirement takes an unexpected turn. Life insurance is one of the most economical ways to give your family a financial future. Permanent life insurance provides you with a source of cash during your lifetime and after your death. Life insurance can help you achieve major and minor financial goals throughout your life. Your family can use the money for anything they need, and the payout is normally tax-free.
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