The Top Nine Features of Life Insurance
Why It Matters
- Life insurance can help families prepare for life’s many curves.
- Term life and universal life insurance are two options for delivering financial confidence.
- Financial reassurance can come from life insurance benefits like income replacement, policy value accumulation, helping with tuition payments, and more.
If the pandemic showed us anything, it’s that life has a way of throwing us curves — and that some are bigger than others. But the better prepared we are physically, mentally, and financially, the better the chances we have to not only survive those curveballs but thrive beyond them. One of the best ways to help ensure we’re able to do that is by having the right kind, and right amount, of life insurance.
What does life insurance cover?
Certain types of permanent life insurance are designed to be flexible to meet your needs as they evolve over time. While its primary purpose is to provide a death benefit, it can be used for many different purposes: tax-advantaged supplemental income through loans and withdrawals;2 federal income tax-free death benefit; and estate planning. The benefits don’t stop there and vary by the type of policy you have. For the sake of this article, we’ll focus on benefits associated with term life and universal life insurance.
What is term life?
Term life insurance lasts a certain number of years, then ends. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. Term life insurance policies are designed to be cost effective and consideration should be given to the insurer’s financial strength.1
What is permanent life insurance?
Permanent life insurance policies offer a death benefit and can also offer cash value accumulation. The death benefit is what is paid to your beneficiaries when you pass away. Cash value accumulation is a separate component that allows you to access your policy value while you’re still alive through loans and withdrawals if there are sufficient funds available.1 Permanent life insurance lasts from the time you purchase the policy to the time you pass away, as long as you pay the required premiums to keep the policy in force. Generally, permanent life insurance is more expensive when compared to term life insurance because of additional features and benefits that these policies have, although a permanent life insurance policy can be less expensive than successive term policies taken until the policy holder is no longer insurable. There are several different types of permanent life insurance, such as whole life, universal life, index universal life, and variable universal life. Because each of these types of permanent life insurance has unique features, it’s vital for you to discuss your life insurance needs with a financial professional to determine what type of permanent life insurance meets your unique needs.
Benefits of life insurance
Some of the benefits of life insurance may surprise you. Here are 9 ways it can help you plan for and protect your future.
1. Protect your loved ones
At a very basic level, life insurance can function as a form of income replacement. Whether or not you’re the main source of income for your family, it’s likely that you help cover the cost of rent, mortgage, groceries, utilities, child care, and other household necessities. For this reason, many insurance experts recommend that people take out a life insurance policy that’s equal to 10-15 times their current income. This may help your loved ones maintain their current lifestyle after you’re gone, reducing their financial burden following your death.2
2. Help provide financial reassurance
One of the top benefits of life insurance is the life assurance that comes with it. There’s an inherent comfort in knowing that your finances are handled. According to insurance expert Laura Adams, “The purpose of life insurance is to make sure that people who depend on you, such as a spouse, partner, children, and aging parents, wouldn’t be hurt financially after your death.”2
3. Help pay off debt
Unfortunately, debt lives on even after we pass away, except for some federal student loan debt. The average American has $90,460, while people from ages 40 to 55 carry even more, with an average of $135,841 in debt.3 Life insurance can be used to help pay off student loans, mortgages, credit card debt, auto loans, and more.
4. Help protect your business
When your business is your lifeblood, you need to have safeguards in place to protect it. Business owners and entrepreneurs can look to life insurance to fund business succession plans. Using life insurance and buy-sell agreements upfront can help ensure continuity of the business. Whether you have two partners or multiple partners, you want to make sure that the business is passed to those who have an interest in it. In addition, life insurance can potentially reduce business taxes, protect against the loss of key staff, and help attract and retain valuable employees.
5. Help pay for college tuition
The costs of college keep rising and it’s inherent on you to find ways to keep up. The average cost of college varies from around $9,500 per year for a public four-year in-state college to $32,000 per year for a private four-year college.3 In addition to providing a death benefit that could be used for education, the cash value in permanent life insurance policies provides access to funds for educational expenses while alive. Families could withdraw some cash value or possibly take a policy loan.1 Withdrawals are generally tax-free, and life insurance policies are not currently counted on the FAFSA as an asset.
6. Help you save for retirement
Since permanent life insurance has a cash value component, you can think of it as a potential source of supplemental retirement income. Life insurance can be a portion of your overall financial plan that allows you to put in net premiums on a tax-deferred basis, and unlike other vehicles, you get to control the flexibility. If properly put together and funded, you can take out a tax-free income over a period to supplement your retirement.4 It is important to consider all options for retirement income such as qualified plans, IRAs, the tax treatment of contributions and distributions, and the fees charged for various financial products.
7. Help cover end-of-life expenses
Final expenses can come as a shock to even the most well-prepared family. They can cost anywhere from $8,000-$10,000 — not including other end-of-life expenses such as medical bills. Your funeral costs may be covered entirely by taking out a final expense insurance policy.5
8. Aid in estate planning
Many people view estate planning as something to be addressed later in life or only after they have accumulated substantial wealth. The reality is that anyone who owns a home, has children, or contributes to a retirement account may benefit from an estate plan. Estate planning is quite different from end-of-life expenses in that it involves securing an attorney to close out any remaining accounts in the decedent’s name and officially report the death to the county and IRS. “A life policy can be used as an estate planning tool to make sure your heirs could cover legal fees and taxes,” says insurance expert Lauren Adams. Many people fail to realize that some descendants may still owe taxes to the IRS, and a life insurance policy can help them cover these costs, so they are not incurring unnecessary financial burden.2
9. Help with charitable planning
By designating a charitable organization as the beneficiary of a life insurance policy, people can leave an “amplified” gift for the causes they believe in. The premiums paid are only a small portion of the total death benefit paid, which allows individuals to leave a larger and more meaningful gift for the organizations they support. “If you want to leave a financial legacy with particular organizations or charities, you can include them as a life insurance beneficiary,” says Adams. This is a great way for policyholders to not only ensure their loved ones are taken care of, but to also make sure they can still contribute to the causes they care about following their death.2
With so many inherent benefits, it’s easy to see the value in obtaining either a term life or permanent life insurance policy for you and your family’s long-term financial reassurance.
Things to Consider
- Permanent life insurance can do so much more than offer death benefits.
- Planning with life insurance today can offer financial confidence for family members tomorrow.
- Talk to your financial professional to determine which type of life insurance is right for your needs.
1“Life Insurance Guide to Policies and Companies,” Investopedia, April 2022
2Loans, withdrawals, and death benefit accelerations will reduce the policy value and the death benefit and may increase lapse risk. Policy loans are tax-free provided the policy remains in force. If the policy is surrendered or lapses, the amount of the policy loan will be considered a distribution from the policy and will be taxable to the extent that such loan plus other distributions at that time exceed the policy basis. Consult with tax advisor for additional information on the tax treatment of loans or withdrawals from a life insurance policy.
3“What Does Life Insurance Cover?” Bankrate, September 2021
4“6 Uses of Life Insurance in Financial Planning,” Forbes, July 2021
5 “What is Life Insurance and How Does It Work?” Money, February 2022