Simply put, life insurance is an insurance on the insured’s life. A life insurance policy provides a lump sum payment to the insured’s intended beneficiary in the event of the insured’s passing. Life insurance is widely considered the cornerstone of sound financial planning. The main reasons for families to buy life insurance include:
- Income replacement for survivors: If your loved ones depend on your income, life insurance can replace your income for them if you die. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.
- Elimination of your mortgage and other debts: If you don’t want your loved ones to be left with any extra financial burden after you die, in addition to providing income to cover everyday living expenses, life insurance can pay off any outstanding balance of your mortgage, car loans, credit card, etc., providing your loved ones with complete financial security.
- Create a source of savings: Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Buying a cash-value type policy can create a kind of “forced” savings plan. The interest credited on this “forced” saving is tax-deferred (and tax-exempt if the money is paid as a death claim).
- Funding for your children’s education: If you want your children to graduate debt-free from college, life insurance policies that carry a cash balance allow consumers to withdraw tax-free up to the amount paid in premiums, or to take out a policy loan to cover the costs of college education.
- Wealth transfer: There are many benefits of using life insurance as a means to transfer your wealth to beneficiaries efficiently, including tax-free transfer, predictable value of death benefits, non-attachment to market performance, etc.
- Create an inheritance for your heirs: Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.
- Final expenses: Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts, and medical expenses not covered by health insurance.
- Make significant charitable contributions: By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.
Your reason to purchase life insurance determines the type of insurance policy and the coverage you need. While the above are the most common reasons why most people buy life insurance, they are not the only reasons why you may need life insurance. You should consult a knowledgeable life insurance agent who will analyze your personal situation to determine whether you need life insurance, and if so, the type and the amount of life insurance ideal for your situation.