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Table of Contents
A big life change can lead many people to start thinking about their future. If you've recently been promoted at work, gotten married or expanded your family, you're likely spending more time considering your long-term financial strategy.
One aspect of your financial road map might be life insurance. You might have a general idea of the advantages of life insurance, but still wonder, "is life insurance worth it?"
The reality is there are a lot of potential benefits to life insurance. Understanding some of them can help you decide if purchasing a policy is the right choice for you and your family. Here are four of those potential benefits.
- Life insurance provides financial protection by covering short-term costs and expenses that your loved ones may face when you pass away. It can help alleviate the financial burden during a challenging time and provide stability.
- Life insurance allows you to leave an inheritance for your loved ones. The death benefit can be used for long-term expenses like college tuition or setting up a financial cushion for the future.
- There are different policy options available, including whole life insurance, term life insurance, and universal life insurance. You can choose the coverage amount and duration that best suits your needs.
- Life insurance often has favorable tax features, with the death benefit typically not subject to income tax. However, there may be other tax implications, so it's essential to consult with a financial representative to understand the specific circumstances.
1. It Helps to Provide Financial Protection
One of the primary reasons someone might consider life insurance is because it can help provide a level of financial protection for the beneficiaries of their policy. When you die, especially if you pass unexpectedly, you could leave behind some unavoidable costs and expenses that your loved ones would have to cover. For example, you might have some unpaid debts that they would have to pay, which could impact their own financial future.
Your life insurance policy could help cover these short-term costs, which can range from funeral and burial costs to mortgage payments. A life insurance policy can also help to provide some financial stability to your loved ones during an already stressful time.
One thing to keep in mind is that the cost of the policy will depend on the type of coverage chosen. For example, if you're operating within a tight budget, a term policy may be preferable, as this type of policy is typically less expensive than other options. Working with a financial representative can help you identify the best coverage option for your situation.
2. It Allows You to Leave an Inheritance for Your Loved Ones
Some people also use their life insurance death benefit as a way to pass an inheritance to their beneficiaries. While the death benefit could help cover short-term costs, you might also want to consider buying a policy that could help your beneficiaries with long-term expenses, too. The beneficiaries listed on your policy could use this money to help pay for college or set up a financial cushion for possible future expenses.
Life insurance also typically does not have to go through the probate process, which often means it can often be paid out much more quickly and not get held up with other legal processes. When you do purchase a life insurance policy, it's important to pick your beneficiaries. That way, you can ensure that the death benefit will go to them when you die.
3. It Offers a Number of Policy Options
Another advantage of life insurance is the variety of coverage options available for most people. You can typically choose your coverage amount and how long you'd like the policy to be in place.
There are typically three types of insurance to choose from:
- Whole life insurance: This type of life insurance can last for your whole life as long as you continue to pay your premiums.
- Term life insurance: This type of policy lasts for a pre-specified amount of time.
- Universal life insurance: This type can offer flexible premiums or an adjustable coverage amount. With universal life insurance, increases in coverage are subject to underwriting, and there must be enough cash value in the policy to cover monthly charges if a lower premium is paid than the amount selected at issue or if a premium payment is skipped. If the cash value is insufficient, additional premium payments may be necessary to keep the policy in force.
Many of these can be added for an additional cost, while some others don't require it. Even though there are a variety of policy options available, you might find that you don't qualify for some life insurance policies. In these instances, you might have to pay higher premiums or have access to fewer life insurance options.
4. It Has Favorable Tax Features
As you begin estate planning, you may find that taxes play a significant part in inheritances. Some people may worry about leaving behind an estate with taxes due, which can reduce the amount that's left to loved ones. This is where life insurance can be advantageous — in many cases, the Internal Revenue Service (IRS) does not charge taxes on life insurance death benefits. Keep in mind, though, that there may be other circumstances where beneficiaries may owe taxes.
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The Bottom Line
As you start exploring your options, you may begin to answer your initial question — is life insurance worth it? For many people, there are a number of potential benefits to purchasing life insurance. However, it's important to choose a plan with coverage that fits your needs.
Talk with a financial representative to determine your options to help you provide some financial stability for your family in the future.