Updated February 8, 2024
Just half of American adults have any life insurance coverage, according to a 2023 survey. It’s a shame, since it’s one of the most useful assets you can have. There are a number of benefits to having life insurance, including these five features you might not have known about:
Life Insurance May Cover Final Expenses
Life insurance lightens the load by covering funeral costs and other expenses, sparing your loved ones financial strain during an already difficult time. Depending on your policy, additional funeral or cremation costs, medical bills, and estate settlement costs may also be covered.
Your Dependents Can Use it For Living Expenses
With a death benefit of the right size (a common rule of thumb is 10 times your income), life insurance can provide a safety net for your family. They can use your death benefit to maintain their lifestyle and cover essential expenses (like rent or mortgage payments, utility bills, and groceries) without worry.
Tax-Free Protection for Beneficiaries
Life insurance payouts are tax-exempt, meaning your beneficiaries are not required to report the received funds when filing their tax returns. However, if a beneficiary receives earned interest, such as from an installment payout option, any interest received is taxable and must be reported as such.
Flexible Coverage for Terminal Illness or Chronic Condition
Customizable riders like accelerated benefits and long-term care coverage provide financial flexibility during times of illness or unexpected need. For example, a long-term care (LTC) rider will pay for expenses such as a home health-care worker, long-term care facility, or nursing home care.
Life Insurance Can Supplement Retirement Income
Life insurance, such as whole life policies, not only secures your loved ones' future but also accumulates cash value over time, offering financial flexibility for major expenses or as a supplement to your retirement income. The cash value of whole life insurance grows tax-deferred, so there are no income taxes accrued on the cash value (or its growth) until it is withdrawn.
Most Common Life Insurance Policy Types
There are five main types of life insurance: term life, whole life, universal life, variable life, and final expense coverage. Each type offers distinct features and advantages.
For instance, term life insurance tends to have lower premiums, but it comes with an expiration date. On the other hand, whole life insurance costs more initially, but provides coverage for your entire lifetime as long as premiums are maintained. Here’s a closer look at the five main types.
Term Life
Term life insurance provides coverage for a specific period, typically ranging from 5 to 30 years. During this term, if the insured individual passes away, the policy pays out a death benefit to the beneficiaries.
Once the term expires, coverage ceases unless the policy is renewed or converted to a permanent life insurance policy. Term life insurance is a good choice to cover temporary needs, such as mortgage payments, education expenses, or income replacement during working years.
Whole Life
With whole life insurance, you generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims-paying ability and financial strength of the issuing insurance company). All you have to do is continue to pay the fixed premium, and you can rest assured your family will be covered.
Universal Life
Universal life insurance is a type of permanent life insurance that offers flexibility in premium payments and death benefits. It combines a death benefit with a cash value component, allowing policyholders to adjust their premiums and coverage levels over time.
The cash value earns interest at a rate determined by the insurance company and can be used to cover policy expenses or increase the death benefit. You can also access the cash value through loans or withdrawals, although these may affect the death benefit and incur fees. Universal life insurance is a popular choice for estate planning and long-term financial protection.
Variable Life
Variable life insurance combines life insurance coverage with investment opportunities. Unlike traditional whole life insurance, variable life policies allow policyholders to invest their cash value in various investment accounts.
These accounts function like mutual funds, with the potential for growth based on market performance. Keep in mind the cash value and death benefit of variable life insurance policies can fluctuate depending on the performance of the chosen investments.
Final Expense Coverage
Also known as burial insurance, final expense coverage is designed to cover end-of-life expenses such as funeral costs, medical bills, and other debts. Final expense coverage typically has lower premiums than traditional life insurance policies, but it also offers a lower coverage amount.
Final expense coverage provides peace of mind by ensuring that funeral and burial expenses are taken care of, so your family members don’t have to worry.
In short, life insurance is a lifesaver. Its main purpose is to make sure your family is OK financially if something happens to you. And that monthly premium is nothing compared to the peace of mind this offers. This underutilized tool should be part of a well-rounded retirement plan.
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