Life insurance is a straightforward arrangement. You pay premiums to an insurance company and if you ever die while covered, your beneficiaries receive a payout called a death benefit. When people hear how this works, they likely think of a few obvious reasons for life insurance, such as paying for their funeral or taking care of their young children. And these are great uses.
But there are many other ways you could leverage life insurance to help improve your financial situation and make life better for your family, business partners, charities or even yourself. If you're wondering why you might buy life insurance, here are some of the lesser-known reasons to consider.
1. Paying Your Mortgage
When you buy a new house with a mortgage, the plan is generally to pay off the home loan over 15, 20 or even 30 years. If you die before paying off the entire mortgage, it could be difficult for your family to make payments without your salary, and they may face a tough decision. They may then be compelled to sell, even if the market isn't good.
You could purchase a life insurance policy in an amount that would help cover some or all of the outstanding mortgage.This may help your family keep a valuable asset rather than another debt. This could be important if others live with you, like your spouse and children. Life insurance could help them keep their home even after you've died.
2. Reducing Debt
Your debt is just your problem, right? Well, it depends. Most debts are only your responsibility. If you die, the creditors will generally try to get repaid out of your estate, which is everything you owned. But if there's not enough to pay everyone back, the creditors will not be able to go after your family members.
However, if anyone cosigned your debt, then they may be fully responsible to repay all of it after you die. Keep this in mind if you asked anyone for help to qualify for anything, like your parents for your student loans. Life insurance can help cover these costs and help you avoid passing your bills on to someone else.
3. Protecting a Small Business
If you own a small business, the company relies on you. Even if you've trained a replacement and have a plan for someone to take over, your staff generally expects your help with the transition. The sudden death of the owner could cripple a successful business. Life insurance could help give your other business partners and employees the money they need to overcome this setback.
It's also one way to help handle the transfer of ownership between partners. Through a buy-sell agreement, business partners buy life insurance on each other. If one dies, the other partners use the life insurance funds to buy out the deceased partner's share in the company. Without this setup, the partial ownership would go to the family members instead, who may not be ideal partners to help you run the business.
4. Building Cash Value
Permanent life insurance, which never expires as long as scheduled premiums are paid and the policy does not mature, may build an added benefit called cash value. The insurance company invests the money so the money has potential for growth.
While you're still alive, you can borrow against the cash value for any reason, such as paying for a wedding, buying a new car or saving for retirement. Just keep in mind that a loan will reduce the death benefit and cash surrender value, and may cause the policy to lapse. If you die before the loan is repaid, the insurance death benefit will be reduced by the loan amount and your beneficiary will receive the remainder.
5. Donating to Charity
Do you give regularly to charity? Life insurance could help you make an even larger donation. Rather than donating money to your charity each year, you could put money toward a life insurance policy. There are several ways to donate to charity through life insurance, and you may want to speak to a financial professional to learn more about your options.
These are all some less obvious yet important reasons for life insurance, even if you think you don't need it today. The earlier you start planning, the more options you'll likely have available. If any of these ideas caught your attention, consider consulting with a financial representative to learn more.