What happens when the breadwinner of a family of four suddenly passes away in an unexpected heart attack? In addition to emotional turmoil, the remaining family may face financial stress unless they have life insurance. One of the biggest benefits of life insurance is financial protection for loved ones.
While working in the financial services industry, I saw a very similar and unfortunate situation play out where the breadwinner of the family passed away suddenly.
Of course, there’s no replacement for a lost family member, but the money from life insurance helped the man’s wife and two young children have financial peace of mind. It gave them the space they needed to grieve. And that’s just some of the benefits of life insurance.
No one wants to think about their death, but it’s a part of life. Planning ahead with life insurance could help your loved ones overcome financial obstacles when you pass—and some policies can provide living benefits to you as well. Dive in to learn more about the advantages of life insurance and learn how to evaluate your life insurance needs.
Benefits of life insurance
You probably know how important life insurance is for women, but it’s still a good idea to understand the complex advantages and disadvantages of life insurance.
In most cases, the advantages of life insurance outweigh the disadvantages—by a lot. Let’s take a closer look at the distinct benefits of life insurance.
Help protect your loved ones
Life insurance is an important part of your estate planning checklist. One of the biggest advantages is the financial protection it provides your loved ones if you pass away.
Imagine what could happen to your family if you weren’t around to care for them. Depending on the situation, your loved ones could quickly fall into a bind without your financial support.
Unfortunately, that could lead to additional stress as they navigate an emotionally challenging time without you. With the financial support provided by insurance, your family can stay on track. Your thoughtfulness will continue to help provide for them while they grieve and beyond.
In addition, the payout from your insurance policy could help your family get ahead financially.
For example, your policy may be able to help cover the cost of college tuition for your children.
Peace of mind
Do you have dependents who rely on you to support their financial needs? If so, you may find it easier to see the benefits of life insurance, such as providing income replacement if you pass away.
You’ll protect your peace knowing that your family will be taken care of financially, even after you’re gone. The simple fact that your family will find financial help is enough to make anyone feel more comfortable.
It can cover funeral expenses
No one really wants to think about their funeral. But one of the leading benefits of life insurance is it can cover costly funeral expenses.
The median cost of a burial funeral in the United States is $8,300! That’s a lot of money that could help your family in their time of need.
Provide potential tax advantages
Some of the advantages of life insurance aren’t directly related to the payout of a policy. Namely, many life insurance plans offer tax benefits to policyholders and beneficiaries.
When an insured passes away, their beneficiary can receive a lump sum payout of the life insurance death benefit tax-free. Not having to pay taxes on a large sum of cash helps the money go further in covering expenses.
Policyholders can also get tax benefits from life insurance through tax-deferred cash value. Permanent life policies that include cash value components let policyholders save a portion of premium payments into a cash value account. The money in this account generally earns interest (or investment earnings) over time.
However, the policyholder doesn’t have to pay taxes on the earnings until they withdraw funds.
Build generational wealth
The most basic use of a life insurance policy is to provide financially for your loved ones after you’re gone.
For example, a policy might help replace your income so your partner can pay the mortgage and other ongoing bills well into the future.
However, you can also use a life insurance policy to build long-term wealth for your heirs—and generations to come. The right life insurance plan can provide the windfall needed to start the process of building generational wealth.
Generational wealth refers to assets that pass from one generation to the next. These assets continue to grow over time, providing each future generation with a larger financial safety net.
Let’s say you have a life insurance policy with a death benefit that could pay off your remaining mortgage balance with enough left over to invest. When you pass, your beneficiaries pay off the house.
Now, they have debt-free housing and can put more money into savings and investments. When they pass, their children inherit the house and a sizeable savings. The children rent the house for additional income and continue to invest their savings.
May offer living benefits
Many life insurance companies make it easy to tailor your life insurance policy to your needs through riders. Riders, also called policy endorsements, are optional coverage you can add to your regular policy.
Riders can increase the benefits of life insurance, but adding riders generally increases premiums. Insurance riders are most common on permanent life insurance, such as a whole-life policy.
Some of the most popular insurance riders are known as “living benefits.” Life insurance is designed to provide financial support to loved ones after you die, but living benefits riders let you use your policy while you’re still alive. Common living benefits riders include:
Accelerated death benefit
This rider gives the policyholder a portion of the death benefit if they’re diagnosed with a terminal illness and a shortened life expectancy, which they can use for medical bills and related expenses.
Critical illness
This endorsement pays the policyholder a lump sum payment if they’re diagnosed with a medical condition specified by the policy, such as cancer or heart attack.
Chronic illnesses
A chronic illness rider helps policyholders pay for caregiving costs if diagnosed with a chronic illness that impairs cognitive function or two or more activities of daily living (ADLs).
Long-term care coverage
This type of rider helps cover the cost of long-term care, such as living in a nursing home or assisted living facility.
Waiver of premium
This endorsement waives future premium payments if the policyholder becomes physically impaired or very ill.
Although less common, some term policies offer living benefit riders for policyholders.
For example, you may be able to add a terminal illness rider to a term policy.
Disadvantages of life insurance
Although there are many advantages, let’s dive into a few disadvantages to help you decide what’s best for your situation.
Certain policies are costly
In the long run, the benefits of life insurance are wonderful for your family.
However, some policies can get costly depending on the type of life insurance coverage you get. That’s why it’s important to evaluate your needs to determine what’s best for you and your family.
For example, I generally recommend that people looking for permanent life insurance consider universal life policies instead of whole life policies. That’s because whole-life policies can be more expensive when comparing premium dollars to benefits.
Discovering the advantages and disadvantages of life insurance can help you decide on coverage, which could save some costs. Be sure to do some research before getting a policy, such as understanding the difference between a term life policy vs whole life insurance policy.
Your age is also a factor in cost. For instance, the average term life insurance policy for a 25-year-old non-smoker is $31 per month, but if you’re 50, it’s $118.
Hidden terms or exclusions
Life insurance is complex and can be overwhelming if you don’t know what to look for when reading a policy. Some policies may have specific terms or exclusions of what’s covered that you’re expected to know.
For instance, some insurance carriers may deny you or the cost can be higher if you participate in dangerous sports like scuba diving or have health conditions.
This means if they do offer a policy, it will come at a higher price. Plan to review your policy with your agent so you understand precisely what it will cover if something happens to you.
Expert tip: Consider term life insurance at the minimum
Don’t think you can afford life insurance? Even if you don’t have a lot of assets or any dependents, a small budget-friendly life insurance policy, like term life insurance, could help loved ones cover your final expenses if you pass away. So take some time out to explore your term life insurance options based on your budget.
How life insurance works
Life insurance is a contract between you and a life insurance company. You promise to pay your premiums for the duration of the policy.
In return, your insurance company promises to pay the face value of your policy to your beneficiaries if you pass away while the policy is active. Your beneficiaries could be a spouse or partner, children, or even a charity organization.
There are also two main types of life insurance:
Term life insurance policy
Permanent life insurance (such as whole life or universal life insurance)
Term policies offer coverage for an agreed-upon term, such as 20 years. Your coverage expires at the end of the year.
Permanent coverage, on the other hand, provides insurance benefits for your entire life. Permanent policies include a cash value component, which lets you save up part of your premium in a savings account. Some permanent policies may even pay dividends.
Do I need life insurance?
Although there are clear benefits of life insurance, you may not think you need to pursue this path. Let’s look closer to find out if life insurance is in your best interests.
Do you have dependents?
If you have dependents who rely on your income, then life insurance is an easy decision. You should absolutely purchase a policy that will help protect your spouse and children if something happens to you.
If you don’t have any dependents, life insurance becomes a bit more complicated. While some people may wait until they are preparing for a baby or have children to take out a life insurance policy, there are benefits to getting one earlier than that, especially if you have a spouse who relies on your income.
Do you share financial obligations?
Beyond protecting your dependents, you should take measures to help protect anyone with whom you share financial obligations. Take a minute to consider any financial obligations that could become a burden to those you leave behind.
For example, many young, newlywed couples could benefit from life insurance, even if they do not have children. It’s especially true if they have a substantial amount of student loans or will need to lower credit card debt that requires two incomes to repay. If you left your spouse behind prematurely, could they comfortably afford the life you have built together?
Beyond shared debt between partners, you may have co-signed loans with another family member. Without life insurance, they could be put in a difficult situation if you left this world unexpectedly.
If you have a mortgage, life insurance can be a great way to guarantee your loved ones aren’t left with your debt if you pass away. I highly recommend a term life policy that covers the balance of your mortgage. Just make sure your term is at least as long as your remaining mortgage term.
Why shouldn’t I delay getting life insurance?
It’s easy to look at life insurance as another expense you don’t want to add to your budget. With that, it is tempting to put off purchasing a policy until it is absolutely necessary.
But if you delay it too long, it might be too late to help protect your family if something unexpected arises.
If you are looking to save money on life insurance, then you should move forward as quickly as possible. From a cost perspective, it makes more sense to purchase a life insurance policy while you are young.
In my experience working in life insurance, the cost increases significantly as you get older—even between ages 29 and 30! That’s simply because life insurance rates are often the cheapest when you are young and perceived to be very healthy.
Plus, it can be a better value for your money to purchase a policy earlier in life since you can typically lock in a lower rate when you are still young and in good health.
If you think your family could benefit from life insurance, now is the best time to act. Once you decide life insurance is a good choice for your situation, putting off the purchase could lead to higher rates.
Beyond the cost, delaying your life insurance could lead to dramatic consequences for your family if you aren’t able to finalize a policy in the event something happens to you.
Is it really worth having life insurance?
In many cases, yes! One of the benefits of life insurance is that there are many different types of policies to choose from. This makes it easy to find a policy that fits your needs and budget.
Life insurance can help your family pay expenses, cover funeral costs, and more without worry.
Do you gain money from life insurance?
Permanent life insurance policies feature a cash value component, which lets you build cash within your policy. You can use your cash value in many ways, including:
Supplementing retirement income
As an emergency fund
Paying life insurance premiums
Collateral for a loan
What types of life insurance are there?
There are several types of life insurance, but all fall into two categories: term life insurance and permanent life insurance. Term policies provide coverage for a specified amount of time, called the term. At the end of the term, the policy expires, and the insured is no longer covered.
Permanent insurance covers your entire life, providing you pay your premiums. Permanent policies also include cash value options to help you build cash savings from your premium payments.
Term insurance policies are generally less expensive than permanent policies.
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Get the benefits of life insurance to ensure your peace of mind
There are advantages and disadvantages of life insurance, but it is an excellent way to help protect your loved ones from financial stress.
With a life insurance policy, you can help protect your family from the financial repercussions of your passing. It can allow them to mourn in peace without wondering how they will be able to pay ongoing bills.
Even if you don’t have dependents or major assets, I recommend considering life insurance as a way to help cover your final expenses if you were to unexpectedly pass away.
Learn even more about life insurance with our completely free “Life Insurance 101” course! Don’t forget to tune into the Clever Girl Finance YouTube channel and Clever Girls Know podcast for more key financial tips!