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Purchasing life insurance can help protect your family financially after you've passed. But only 57% of Americans are covered by a life insurance policy. If you don't have a policy and are wondering why people buy life insurance, here are some of the most common reasons to consider.
1. To Replace Income
One common reason to purchase life insurance is income replacement. Research notes that, in the U.S., at least one in three families are likely to face financial hardship within a month of the death of a primary wage earner, and more than half of families face financial hardship within a year.
Typically, a primary goal of life insurance is to help provide financial security for your beneficiary — the person who will receive the death benefit of your life insurance policy. To do that, you will likely need to think about the long term. If you have an employer-sponsored life insurance plan, it may not provide enough coverage. Plus, you might not be able to keep the policy if you change jobs. However, conversion privileges may apply and you should review your policy for details.
It's also important to consider stay-at-home spouses when it comes to life insurance. Stay-at-home parents provide many vital duties and services at home that have monetary value — even if they aren't bringing home a paycheck. If they were to pass away unexpectedly, it could cost quite a bit to replace what they do, especially in terms of child care.
Reviewing your current life insurance policy if you have one — or your options if you don't — with a financial representative can help you determine the best coverage for your family's needs.
2. To Help Cover Burial Expenses
The national median cost of a funeral is nearly $8,000. Not having the money on hand to cover these costs could make an especially emotional time more stressful, but planning ahead could help to alleviate some of this stress. Your beneficiaries could use the benefit to help cover burial expenses. Some life insurance policies also allow you to list a funeral home as the beneficiary of your policy. As you decide what's right for you, discuss your plan with a legal expert.
3. To Transfer Wealth
Life insurance can play a significant role in your long-term financial planning, as well as your estate planning. After decades of working hard and saving for retirement, some people may want to be able to preserve the wealth they have created over the years.
One way you might do that is by purchasing a life insurance policy so your beneficiary receives a death benefit. This could be a cost-effective way for you to leave an inheritance and help your beneficiary save on the amount of taxes they pay. By working with your financial representative, you can determine which life insurance option is suitable for your needs, as well as those of your beneficiary.
With the right strategy in place, you can help ensure that the wealth you have saved through the decades will go to your beneficiary and help their financial future.
4. To Help Pay Off a Mortgage
Unfortunately, when someone passes away, their debts aren't wiped away. In many cases, these debts still must be paid. So, some people might buy life insurance to help pay off future debts. A life insurance death benefit can ease some of these debts by providing cash to help pay them off.
For example, a death benefit can help your family cover mortgage payments or could even help pay it off. For many, the family home is a special place. Knowing that life insurance could help cover at least a portion of the expenses and allow the family to stay there without any significant disruptions is a powerful benefit.
5. To Plan for Business Continuity
Millions of Americans are small business owners. With that title often comes a lot of responsibility, and it usually doesn't end with your own family. While they may depend on you for your income, your business partners and employees may also count on you to help run a successful company. If you were to pass unexpectedly, this could affect your business financially.
This is another area where life insurance can help. Business purposes are one of several overlooked reasons for life insurance. If this is a concern for you, you could work with your business partners, if you have any, and your financial team to come up with a strategy that will help ensure that your business stays up and running after your death or that of a business partner.
Having a plan in place if something were to happen to key people could make a significant difference in the long run. It can also help to ensure that your business stays in operation and doesn't face gaps in continuity.
6. To Help Reduce Estate Taxes
Taxes, especially estate taxes, can be a concern for some people. Estate taxes are calculated based on the total net value of a deceased person's assets at the time of their death. A life insurance death benefit can be included in these assets if you name your estate as your beneficiary. This can lead to your estate being taxed at a higher rate, leaving those who would inherit your estate with less money over time.
Many choose to name their spouse as their beneficiary because, under current tax laws, most assets passed on to a surviving spouse aren't subject to estate taxes. That may be a conversation to talk about with your spouse and estate planning attorney if you feel it's a good option for your situation.
Any life insurance policy you do have could help to cover at least a portion of the estate taxes that your loved ones might face. Listing someone as your beneficiary rather than listing your estate can also help to reduce the possibility of your loved ones getting a big tax bill after you pass.
You may want to consult with a tax professional to determine the right path for you and to see if there are ways to reduce your estate taxes with your life insurance policy.
7. To Take Advantage of Potential Tax Benefits
Life insurance can also provide tax advantages that could be helpful when preparing for the future. According to the Internal Revenue Service (IRS), life insurance benefits received after the death of an insured person are not likely to be included in your gross income and usually do not need to be reported. Your beneficiary typically would not owe estate or income taxes on the benefit once they receive it.
Permanent life policies can also allow for tax-deferred growth, which means there's potential for the cash value in the policy to grow over time. It's also possible to make withdrawals from that cash value. These withdrawals may not incur tax liability in some scenarios, which means they could potentially help to supplement your retirement income. However, any withdrawals will affect the death benefit that your beneficiary would receive and could cause the policy to lapse.
8. To Pay for College
When it comes to planning for the costs of college, life insurance may not be the first step you factor. But if you end up unexpectedly passing before your child is in college, your life insurance could help cover the costs of their education. In addition, if your child is out of school but paying student loans, the death benefit could also help to reduce some of those expenses or potentially cover them completely.
While there are several other methods to save for college now and into the long term, life insurance can potentially provide a buffer of funds in the event that the unexpected happens.
9. To Make a Charitable Donation
If you don't have family members or business partners that would need such a policy, you may not see a need for a life insurance policy. But you can also leave the death benefit to a charitable organization. For example, depending on the type of life insurance you have, you may be able to name the charitable organization as your beneficiary. Then, when you die, the death benefit will go to the organization as a gift from you.
10. Examine Your Needs
Not everyone has the same needs, and no two situations are the same. The reasons why someone might want to take out or increase an existing life insurance policy vary person to person — and perhaps there are some you've yet to consider.
It's important to take a look at your current circumstances and future plans with your financial representative. Together, you can figure out what your unique life insurance needs are to help ensure your family is protected over the long term.