Life can bring on unexpected twists and turns, unfortunately including death. Life insurance provides a financial cushion to your loved ones should the worst happen to you. What are the benefits of life insurance?
No matter how old you are now, it's important to understand when you may need life insurance. Here are some example situations when life insurance is beneficial:
- You're in a long-term relationship or married with shared financial obligations.
- You have kids or plan to start a family.
- Your elderly parents are dependents in your care.
- You have sizable mortgage debt, student loans, credit card debt, or medical bills greater than the value of your assets.
- You don't have enough liquid assets or cash to cover end of life expenses such as a funeral. Consider getting final expense insurance if you're of advanced age.
- You're a small business owner in which you play a primary role.
Benefits Of Life Insurance
When considering whether or not you should get a life insurance policy, it's helpful to understand how a policy can protect your loved ones financially. Here are the main benefits of life insurance.
1. Cover Funeral Expenses
Many people are shocked to find out how expensive burial services and funeral arrangements cost. Funeral expenses can vary widely based on location and the products and services selected. But it's common for them to average around $10,000 – $12,000. Some families face much higher costs in the $20,000 to $30,000 range, even up to $50,000.
When someone dies, there isn't much time to sort things out. Having a life insurance policy can help cover your funeral arrangements so your family won't have to scramble to come up with the necessary funds. It's also a good idea to figure out what type of service and products would be suitable for you and your family when you’re not emotionally fragile.
2. Settle Outstanding Debts
Most people don't want to burden their families with debt when they die. Although some forms of debt are forgiven at death, many are not and must be settled with the assets in your estate.
If you currently have a sizable amount of debt or plan to in the future, a life insurance policy can provide your beneficiaries with the cash flow they need to settle your accounts quickly.
The proceeds of a life insurance policy can be put toward debt such as medical bills, your mortgage, personal loans, student loans, auto loans, credit card debt or unpaid taxes.
If you have some unscrupulous creditors, paying them off is one of the biggest benefits of life insurance. You don't want to endanger your family if you have debt outstanding by shady characters.
3. Replace Lost Income
If you are a primary wage earner in your family, the loss of your income at your death could put significant strain on your family's finances. A life insurance policy can protect your family financially, so they can pay for ongoing expenses and maintain their existing lifestyle as much as possible.
How much life insurance should you get? A general rule of thumb is to get a policy with a death payout that's around 6 to 10 times your total salary. You may need more or less depending on your debt obligations, lifestyle, expected age at death, and your number of dependents
Replacing lost income before you can tap a pension, collect Social Security, or build up enough passive income is important.
4. Pay For Everyday Expenses And Emergencies
Life insurance can help cover every day living expenses such as food, shelter, transportation, childcare, education, clothing, and utilities.
If you have young children, you should consider getting a policy large enough to cover their most important expenses for the remainder of their childhood or until you anticipate they will be financially independent.
Building in a financial buffer for unanticipated emergencies is worth considering as well.
5. Protect Your Assets
As your wealth grows, it becomes more and more important to protect the assets that you've worked so hard to acquire. It's also wise to keep the liquidity of those assets in mind when determining how much life insurance to get.
Assets like real estate and business equity can take a long time to sell. As a result, your family could face financial difficulties with paying bills in the short term if you don't have a life insurance policy for them to access.
In addition, you may have assets that you want to pass down to your heirs and keep in the family indefinitely. A life insurance policy can provide your family with the cash flow they need and keep your valuable assets in your estate. Explore the different types of life insurance here.
6. Save On Taxes
Life insurance policies can't get you out of taxes you legally owe from your income and investments, but the death benefit payouts are typically tax-free for your beneficiaries.
Exceptions can include estate taxes if your death payout goes into your estate instead of directly to a beneficiary, or taxable earned interest that accrues on delayed payouts.
In fact, the more income you make, the more valuable life insurance is. The higher your income, the higher your marginal tax bracket. As a result, you have to make and save even more money to replicate the death benefit.
Tremendous Benefits Of Life Insurance
The benefits of life insurance are plenty. A life insurance policy can provide critical financial relief and help you and your family sleep easier at night. Nobody wants to think about death, but knowing your family will be taken care of if anything should happen to you is reassuring.
Thanks to technology, it’s easier than ever to compare term life insurance policies. The most efficient and free way to get competitive life insurance quotes is to check online with PolicyGenius. They are the #1 life insurance marketplace where qualified lenders compete for your business.
You can quickly search for policies across multiple carriers through PolicyGenius’s online portal for free. I’ve know the founders of PolicyGenius for years and they have truly build a fantastic resource for individuals.
About the Author
Sam worked in investment banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $265,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too. He started Financial Samurai in 2009 and has grown it to be one of the largest independently owned personal finance sites in the world with over 1 million organic visitors a month.