Life insurance is one of those things that we kind of know we need, but many of us don’t want to deal with getting it right away. Sometimes, it’s hard to even think about because, for many people, the whole idea is just plain scary. However, we can’t downplay the importance of life insurance, how life insurance protects our finances and family, and how much peace of mind it can give you.
Perhaps you feel like you are young and have plenty of time, or you even feel like, if something happened to you, there would not be any major financial impact. Or maybe you can’t decide what insurance type would work best for you.
Well, if you’ve ever felt any of the above, this article is here to help you understand the importance of life insurance and how to ensure you are covered. Let’s get into it!
Benefits of life insurance
Life insurance is not something to be afraid of at all.
In fact, having life insurance is protection for you and your loved ones that can minimize or potentially eliminate financial distress.
And it’s something you want to seriously consider, especially if you have kids or dependents or hold assets like a home.
There are seven main benefits of life insurance:
- Financial safety net for you and your family
- Creates generational wealth
- Covers final expenses
- Replaces income after a death
- Provides a tax-free death benefit
- Customizes protection and living benefits
- Supplements retirement or other savings
Let’s dive a little deeper into the importance of life insurance and why it’s a good idea for you.
1. Financial security for your family
The main benefit of a life insurance plan is to provide financial protection and peace of mind to you and your family.
When you have a life insurance policy, you can be sure your family will be taken care of, even if you pass away. While it’s not fun to think about, knowing your family is protected can help take a weight off of your shoulders.
That peace of mind and relief is enough of a reason to get life insurance for many people, especially if you have children.
2. Builds generational wealth
Yup, life insurance is one way in which people transfer their legacies and create generational wealth.
Having life insurance is a foundational element when learning how to make a financial plan.
When you pass, your assets go to your heirs. So, a life insurance policy can be a major asset to pass on to your children or other dependents.
But keep in mind that you don’t need to have a million dollar life insurance policy. Having enough to cover what you bring to your family is a good start.
3. Covers your final expenses
Funerals and other end-of-life costs are expensive. Depending on your final needs, your family may have to pay thousands of dollars to put you to rest.
Part of the importance of life insurance is that it’s a great way to cover funeral expenses and help you out with what to do when a loved one dies. Your beneficiary can use the proceeds of your life insurance policy to cover the final costs you may have.
4. Replaces lost income
Do you bring in income to your family? Additionally, what would happen if they suddenly lost access to your income?
Life insurance addresses this issue by replacing lost income when a family member dies. These funds can be essential to helping your loved ones cover day-to-day living expenses.
Additionally, life insurance benefits could help cover big life expenses for your beneficiaries, such as college tuition.
5. Tax-free inheritance for your heirs
Did you know life insurance has tax benefits?
For example, in general, most life insurance payouts are tax-free for beneficiaries. So your heirs will simply receive a lump sum payout without paying income tax on the money.
For instance, let’s say you have a $500,000 policy and pass away. Your beneficiary would receive $500,000 in cash without paying income or estate taxes on it.
In addition, think how far that money could go toward their short and long-term needs and financial goals, which really shows the importance of life insurance!
If you are wondering if your life insurance payout will be tax-free, refer to this helpful tool from the IRS.
6. Access living benefits with riders
Your beneficiaries aren’t the only ones who can benefit from your life insurance policy. Policyholders can use riders, also called endorsements, to customize their policy with living benefits such as:
- Long-term care
- Disability income
- Guaranteed insurability
- Critical and chronic illness riders to cover medical bills
Be aware, however, that adding endorsements to your policy generally increases your premium payments.
7. Supplement retirement savings with cash value
Specific types of life insurance can help you build wealth even while you’re still alive.
For example, permanent life insurance policies like a whole life policy have a feature known as cash value.
Cash value life insurance is a type of savings account with interest, and it’s tied to your life insurance plan. Part of your insurance premiums go into the savings account.
You can use the money in the account as extra savings, such as a boost in retirement.
Additionally, some policies let you use cash value to pay ongoing insurance premiums once you reach a certain value.
Expert tip: Don’t wait to buy life insurance
The earlier you get life insurance, the better. In fact, life insurance premiums tend to be lower the younger you are. If you wait until you’re older, you may pay more in premiums.
In order to save money and be sure your finances are covered, It’s a good idea to get life insurance as soon as possible.
The cost value of all you do and how insurance ties in
As a mom of two small children with a small business, I have a huge impact on my family’s financials. And it’s not just tied to the money I bring in with my business. It’s also from the cost of all I do in my household.
One day, I sat down to really calculate the cost value of all I do for my family, and I was surprised. Shocked even.
I added in all my jobs. They include:
- Watching and teaching my kids (Job title: babysitter/teacher).
- Cooking for my family (Job title: chef).
- Cleaning my home (Job title: housekeeper).
- Driving my kids around (Job title: car service).
If I were to hire people to do all of these things that I currently do for my family, it would cost me over $70,000 a year!
That alone would have a huge financial impact if (God forbid) something were to happen to me. And I didn’t even include my other annual financial obligations, for instance, my kids’ education expenses or our household bills and mortgage.
Life insurance is a non-negotiable for me for this reason. My 20-year, $500,000 term life insurance policy will help ensure my family is protected financially and can help to cover several years of the loss of my value and income.
My husband also has a life insurance policy in place as well since he also contributes substantial income to our family. If you are the primary female breadwinner or the only breadwinner, then putting yourself in this scenario makes having life insurance even more critical for you.
Life insurance and your long-term goals
What are some of the biggest long-term financial goals you currently have?
Personally, I’m saving for retirement and my kids’ college education through 529 plans and custodial accounts. I have a vision of exactly how I want to retire, as well.
In addition, similar to the gift my parents gave me, my husband and I have decided that we will be paying for our kids’ college education in full, wherever they choose to go. (As well as imparting financial literacy for kids to my children).
But again, if something were to happen to me, these goals could very well be thrown out the window if both my spouse and I don’t have a life insurance policy in place.
It could mean a difficult retirement for me or my spouse and student loan debt for my children. All scenarios I don’t want, and that’s why I recognize the importance of life insurance, in addition to my savings and investments, as a safety net.
Make the process of getting life insurance simple
The truth is life can be hard, and unexpected situations happen.
However, it’s better to have a plan in place than face the unknown unprepared. One key element of your plan should be getting life insurance.
The good news? It doesn’t have to be a complex process.
Term vs. permanent life insurance
The first place to start would be to determine whether you need term vs. whole life insurance that includes a cash value.
Term policies are life insurance that expires after a set number of years, known as the policy term. At the end of the term, the policy expires, and you no longer have coverage.
Typical term lengths range from 10 years to 30 years or more. Some term policies have conversion riders that let you convert your policy to permanent life insurance.
Permanent life insurance works as it sounds: it lasts your whole life as long as you keep paying premiums. While permanent coverage tends to be more expensive, you may find the additional cash value and other benefits to be worth the cost.
Determine coverage needs
Once you know if you want term or permanent coverage, you can figure out how much coverage you need. There are many life insurance calculators available online to help you estimate your needs.
You can also reach out to a local life insurance company or agent for advice on your coverage options. They’ll be able to help you calculate a death benefit amount and discuss any riders you might need.
Compare coverage options
Be sure to shop around to compare policies and rates before you make a final decision. I recommend getting at least three life insurance quotes from different providers before signing up. Getting multiple quotes for similar policies will let you compare costs side-by-side.
You should also do due diligence on the life insurance company. Try Googling the insurance company and reading online reviews. The last thing you want after you pass is for your loved ones to have to deal with a difficult life insurance company.
Apply for coverage
So, you’ve found a life insurance policy and are ready to sign up.
First, you’ll need to fill out an application. Many policies will also require a medical exam to determine your risk level. Some policies, such as online term life insurance, offer coverage without a medical exam.
After your exam is done, the life insurance company will determine your risk rating. The better the risk rating, the lower your premiums. Generally, young, healthy people pay the least in insurance premiums.
Sign your coverage and put it in force
Once your insurance application is approved, you’ll receive a copy of the policy and a form to sign. Be sure to carefully read the policy to make sure you’re getting the coverage—and premium payment—you agreed to.
What is the most important use of life insurance?
The most important use of life insurance is to provide financial support for your beneficiaries after you die. Financial support might mean paying a child’s college tuition using life insurance proceeds.
Or, your life insurance policy could help cover the loss of your income if you’re the sole breadwinner in your family.
No matter how the funds are used, life insurance is there to help ease the financial burden of your death.
What are 3 things life insurance covers?
Life insurance coverage protects your family from financial hardship after your death. The importance of life insurance can be broken into three categories:
- Covering the daily or future needs of your loved ones.
- Building generational wealth for your descendants.
- Providing living benefits for you as you age.
What are the pros and cons of life insurance?
While there are many good things about life insurance, there are also drawbacks. Take a look at some of the pros and cons to help you find a policy that’s right for you.
Benefits of life insurance
The pros of life insurance include:
- Financial protection for your family
- Customized coverage to fit your needs
- Easy access through online life insurance companies
- Rounds out an estate plan
- Builds wealth for future generations
- Protect your peace of mind
Cons of life insurance
The cons of life insurance include:
- Expensive for older adults or those with health conditions
- Cash value may not provide a huge nest egg
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Don’t overlook the importance of life insurance
Ultimately, the importance of life insurance is to provide peace of mind that your loved ones will be taken care of. And thanks to the internet and new technology, it’s easier than ever to get coverage in almost no time at all.
Whatever your financial situation, life insurance protects you and your loved ones. Other great things to consider for financial security include building an emergency fund and investing regularly for the future.
