5 Reasons Why Life Insurance Is Important For Loved Ones

Whether you're married with kids or have a partner or other relatives who depend on you financially, having life insurance can be crucial. Life insurance provides money, or what's known as a death benefit, to your chosen beneficiary after you die. Buying life insurance can help reduce stress by providing your loved ones with money when needed.

Understanding the purpose of life insurance can help you plan for your family's long-term financial needs. Here are five reasons why life insurance is important.

1. It Can Help to Financially Protect Your Family

Life insurance is meant to help protect your family's financial future. Even if you have savings, it's unlikely that it would be enough to cover your family's expenses for several years or even decades if something happens to you unexpectedly. Typically, there are three types of life insurance options to consider: term life, whole life, or universal life. Death benefits are typically paid in a lump sum payment.

Term Life Insurance

This type of life insurance offers coverage for a set period of time — generally 10, 15, 20 or 30 years. Coverage expires at the end of the term. However, most term life insurance policies also offer optional riders that could allow you to renew or convert your policy.¹

Whole Life Insurance

This type of permanent life insurance doesn't expire as long as you continue to pay the premiums. Whole life insurance offers a cash value component that has growth potential.

You also can borrow from the cash value, but loans or withdrawals may generate an income tax liability, reduce the cash value and death benefit and cause the policy to lapse. Loans will accrue interest, and any withdrawals or surrenders could result in a taxable event.² The policy may be issued as a Modified Endowment Contract (MEC) for tax purposes.

Universal Life Insurance

This type of permanent life insurance is similar to whole life because it does not expire as long as you continue to pay the premium and has a cash value component.

With a universal life policy, you typically can adjust the premium and death benefit. However, 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. Additional premium payments may need to be made to keep the policy in force. Increases in coverage are also subject to underwriting.

When taking out a loan or a withdrawal from your cash value while keeping your coverage, it's important to note that loans or withdrawals may generate an income tax liability, reduce the death benefit, and may cause the policy to lapse. Loans will accrue interest, and any withdrawals or surrenders could result in a taxable event.²

2. It Can Replace Lost Income

Whether you have a 9-to-5, are self-employed, or own a small business, your income might cover a portion or even all of your family's daily needs.

Housing, food, utilities, clothing, car maintenance, outstanding loans, and health care premiums are likely all part of your monthly budget. Your family will still need to cover these expenses even without your income. The life insurance death benefit can help provide income replacement your family may need to help cover these expenses.

When considering your options, you may want to think about using a  life insurance calculator to help you determine how much life insurance you need.

3. It Can Help Your Loved Ones Pay Off Debts

Certain types of debt don't go away when you die, which means your loved ones may have to use money from your estate or sell off other assets to cover them. This could leave less money to pay for expenses.

At a time when your loved ones are already dealing with your loss, life insurance can help ease some of the financial burdens they may experience after your passing and help provide a financial safety net.

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4. It Can Cover Funeral Expenses

Funerals can be expensive. Dealing with this financial stress can add to the emotional stress your family might experience. Your family could use some of the death benefit from your life insurance policy to help pay for these costs.

To do this, the policy's beneficiary could direct some of the death benefits to the funeral home for final expenses, or they can pay out-of-pocket and use the death benefit as reimbursement for these expenses.

MORE What Does the Average Funeral Cost?

5. 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 tuition. Even if you've already started contributing to a 529 college savings plan, the death benefit from a life insurance policy can provide additional money to help cover your children's education if you were to die.

Protecting Your Family's Future With Life Insurance

Understanding the importance of life insurance and how much coverage you need informs you when making long-term financial plans. Buying a life insurance policy helps protect your family's financial stability in the event you pass and could help mitigate the stress and burden of an already difficult time.

Depending on your financial goals and needs, buying life insurance could be an essential part of this plan. For more information or to buy life insurance, consider speaking with a financial representative.

¹ Increases in coverage are subject to new underwriting.

² Cash value accumulates over time. You should always determine whether a withdrawal or a loan is preferable for your individual situation.