- Especially if you have loved ones who depend on you for their livelihood, life insurance can offer an extra financial safety net so they will be able to pay expenses should you die.
- Life insurance payouts are generally tax-free, which means more money for your beneficiaries.
- There are different types of life insurance policies you can buy; some include a component that lets you earn cash that you can use.
If you’re thinking about getting life insurance, it can be a confusing process to decide what kind to get. In essence, life insurance is a contract between you and an insurer that provides a death benefit, meaning a payout to your beneficiaries when you die. There are all kinds of life insurance policies out there, and the benefits you get can vary.
Below is an introduction to life insurance and what you can expect if you sign up for a policy. Weigh your options before you decide on a policy, and seek help from a Certified Financial Planner if you feel you need more help.
Inside this article
1. Life insurance can give you peace of mind
We may not like to face it, but death is the ultimate condition of life. Our death could come at any time, and the loss to our families will be devastating in many ways, including financially.
So while it’s uncomfortable, it’s important to consider purchasing life insurance, a contract between you and an insurer that will guarantee your family is looked after upon your death with money that can pay off everything from credit card debt to your kid’s college education. And in that way, it can provide peace of mind while you’re still alive.
Once you decide on a policy, you will pay a monthly premium for a death benefit of your choosing. There are many options out there, some of which require a medical exam to qualify.
2. You can protect your dependents
“A lot of people buy life insurance because they want their family taken care of when they’re gone. It makes sense,” says Jay Zigmont, a Certified Financial Planner based in Mississippi.
Depending on your chosen death benefit amount, you could arrange to provide your dependents, like a spouse or children, with a source of income after your death. You choose the amount of death benefit you want to have, which could help pay off a mortgage, your kids’ college tuition and your funeral. The average death benefit payout is over $600,000. The average funeral costs between $7,000 and $12,000.
It’s important when you’re analyzing coverage to keep in mind current and future expenses.
3. Your beneficiaries get tax-free payouts
There is a key tax advantage that comes with life insurance policies.
“It depends on the structure of how they take the payment out,” says Zigmont. “But, normally, life insurance payouts are tax-free.”
That means the money that’s going to your loved ones won’t be reduced. If, for example you have a $1,000,000 policy, your family will get the entire amount.
However, there are a few situations when it could become taxable, like if your beneficiaries opt to get the payout in installments. They will then be responsible for the interest income, which is taxable.
4. You can be covered for chronic or terminal illness
Life insurance policies often offer riders, additional coverage that you can buy to add to your policy.
One common example is called an accelerated death benefit rider. That would allow you to get a portion of the death benefit payout if you were to become terminally ill. There’s also a critical or chronic illness rider, which works in a similar way. You’d have to be diagnosed with a qualifying illness to access funds, and the money would be taken out of the death benefit.
5. You can earn money
There are two main types of life insurance: term life, which is valid for a fixed amount of time, usually 10 to 30 years, and permanent life, which lasts a lifetime and has the added benefit of letting you set aside money that can grow in value.
Those funds, which are tax-deferred, can then be withdrawn or borrowed against if you need it in the future. Just keep in mind that there are some restrictions, and these options may come with fees.[6, 8] So you’ll want to discuss the potential ramifications with your insurance agent before taking anything out.
Life insurance can be a definite boon to your family, but it isn’t necessary for everyone, says Zigmont. If you don’t have anyone relying on you for financial support, for example, it probably doesn’t make much sense. However, you may still want a small policy in order to have your burial or cremation costs covered, which will likely cost you less than a couple of days’ worth of Starbucks coffee a month.
The key is understanding what you’re signing up for.
“You pay for the level of coverage you want. Generally, that’s 10 to 12 times your salary,” says Zigmont. “Your premium will be based on that coverage, as well as your health and age. Some people also leverage group life insurance at work, which may or may not be cheaper. Find a balance. It’s all a question of how much you want to pay for a premium.”