Life insurance can help your loved ones secure their financial future and can serve as an excellent savings vehicle, making sure their needs will still be met even after you’re no longer around.
Once you die, the insurance provider provides your beneficiaries (your loved ones) with a lump sum payout to help settle debts and financial obligations owed by you – relieving some of their burden.
1. Tax-Free Death Benefit
One major benefit of life insurance is that death benefits tend to be income tax-free for beneficiaries – an invaluable advantage, particularly for high-income individuals and couples where death of one partner could incur significant taxes.
Withdrawals from life insurance policies may also be tax-free (up to the total premiums paid), provided you do not withdraw more than your policy’s current account value (ACB). This feature makes permanent whole life insurance an attractive wealth transfer tool.
Beneficiaries can use your death benefit to pay off debts, finance education expenses, supplement retirement or simply continue the lifestyle they enjoyed while you were alive. Some whole life policies even allow beneficiaries to withdraw cash accumulations and earn tax-exempt interest income throughout their lives – just like with savings accounts! However, due to this flexibility and its potential costs it is wise to consult an insurance and tax professional as early as possible in order to maximize benefits received by beneficiaries.
2. Peace of Mind
Life is full of uncertainties, and having life insurance gives you peace of mind that your family will be taken care of should anything go wrong. A lump-sum payout could cover funeral costs or help them maintain their quality of living after your passing.
Traditional policies generally require a medical exam, and may even inquire into your family health history. Therefore, you should be honest when answering health-related questions when applying. There are also policies with accelerated underwriting capabilities which use data instead of exams to assess risk.
Life insurance may not be compulsory, but investing in it is an intelligent financial move for anyone concerned about their family’s future. If you need help determining whether life insurance is right for you, discuss it with a financial professional to find an insurance provider who meets both your needs and budget – the sooner they connect you with one, the lower their premiums will be!
3. Coverage for Dependents
Life insurance policies purchased for children and spouses/domestic partners may be eligible for tax-deductions; depending on the plan and tax code this could significantly lower premiums.
Dependent life insurance usually extends coverage to biological, adopted and domestic partner children (if state laws allow). A policy’s terms will typically state when benefits will cease for children; FSGLI only covers them until age 26 while group life plans offered to employees could offer up to $50,000 coverage per dependent, up to a total maximum limit of $100,000 coverage across their family plan.
Meldrum suggests that purchasing life insurance policies for children will protect them against being denied coverage in later years if they develop medical conditions or participate in risky hobbies, but to make sure their death benefit will actually go towards helping their loved ones rather than covering administrative fees, it is wise to first address other financial priorities first, such as building an emergency fund and clearing high-interest debt.
4. Protection Against Debts
Life insurance policies offer death benefit payments that can cover student loans, mortgages, credit card balances and auto loans incurred after someone dies – as well as protect surviving family members against financial distress caused by their death.
Whole and universal life policies with accrued cash value offer policyholders another means of accessing funds accumulated within their policies for debt repayment and wealth creation, providing true compound interest growth potential. Borrowing against their own coverage allows policyholders to borrow against it for debt payoff and wealth creation without going directly through banks; making it an appealing alternative when facing poor credit issues.
Though borrowing or withdrawing from a life insurance policy will reduce its death benefit and may incur taxes and fees, it’s wise to consult an experienced financial adviser prior to borrowing from one.
5. Affordability
Life insurance is generally cost-effective compared to other investments, depending on factors like coverage amount and term or permanent policy type. To minimize costs, purchasing coverage while young and healthy can help bring costs down considerably.
Working with a financial professional or other trusted advisor is the most efficient way to determine how much coverage you require. They can also assist in choosing a reputable insurance provider and compare quotes. Group policies typically offer reduced rates than individual policies.
Life insurance should be considered when you have significant debt (like a mortgage) that your partner could struggle to cover upon your death, or you want to leave an inheritance for your loved ones. A life insurance payout can also cover funeral and final expenses while helping reduce taxes or settle outstanding debts.
