10 Reasons You Should Consider a Life Insurance Plan
Life insurance is a product that you purchase from an insurance company. In return for the premiums that you pay, the insurance company guarantees that it will make a lump-sum payment of a predetermined amount to your beneficiaries in the event of your death. The details of the agreement between you and the insurance company are spelled out in the policy that you purchase, which effectively becomes a legal and binding contract between you and the insurance company.1
As an example, suppose that you purchase a life insurance policy in the amount of $100,000 and name your only child as your beneficiary. If you die while the policy is in effect, the insurance company will make a payment on behalf of your child in the amount of $100,000, which is known as the death benefit.
There are two basic types of life insurance: term and permanent. Term is designed to provide coverage over a fixed amount of time, such as 10 or 20 years. Permanent insurance, as its name implies, is designed to provide coverage for life. Although life insurance has both pros and cons, here are 10 reasons you should consider a life insurance plan.
1. To Give You Peace of Mind
If your death would leave your loved ones in a financial bind, you should consider a life insurance plan. Having adequate life insurance will keep you from worrying about the welfare of your loved ones should anything happen to you. Life is full of uncertainties, and there are no guarantees. If you are covered by life insurance, though, you won’t have to live in fear of what the future may hold. You will be able to rest easy, knowing that your loved ones will be provided for. You also won’t have to be concerned with whether or not you have built up sufficient cash reserves.
2. To Cover Final Expenses
A funeral can be a major expense. When you consider all of the components of a funeral service, such as the embalming, viewing, and burial, it is not surprising that a typical funeral costs more than $7,000.2 This amount does not include the cost of such things as a catered luncheon or travel. Obviously, you won’t have to worry about your final expenses once you are gone, but your loved ones will. To avoid a major drain on their finances, you should consider a life insurance plan that would, at a minimum, cover your final expenses.
3. To Get a Discount for Buying a Plan Early
You can save thousands of dollars on life insurance if you purchase a policy while you are young. Age is one of the criteria that insurance companies use to determine premiums. The reason for this is that the insurance company is weighing its risks. If you are young and appear to be in good health when you apply, the insurance company will determine that you are a low risk, and therefore your premiums will be significantly lower than what they otherwise would have been.
Another reason that age matters is because younger people often purchase a policy that gets cancelled after a few years. In such cases, the insurance company collects premiums for several years but never has to pay a death benefit.3
4. To Replace Lost Income
Payment of a death benefit can be used to replace lost income. In the case of two marriage partners where each partner works and contributes to the household income, life insurance can be used to replace the income of one of the partners in the event of that partner’s death. This scenario is true for retirees as well as for those who are still employed.
When a person who is drawing a pension or Social Security dies, that income is lost in most circumstances. With adequate insurance in place, though, the income can be replaced.
5. To Provide for Your Children
There is probably no better reason to purchase life insurance than to provide for your children. Unfortunately, many parents do not want to deal with this subject and simply ignore it. However, your death will not reduce the amount of funds that will be required to provide for your children until they reach adulthood. After you are gone, there will still be expenses related to housing, food, education, and transportation. It has been estimated that the cost of raising a child now exceeds $200,000.4 This is even more critical if you are the parent of a special-needs child.
In any case, life insurance can finance your child’s future and insure that their needs will be provided for.
6. To Eliminate Debts
The average U.S. household owes more than $130,000 and carries over $15,000 in credit card debt.5 If this is the situation in your household and you should die, who will inherit those debts? Will your spouse have to take on a second job, or will your family be forced to file for bankruptcy protection?
You can rest easy and insure the well-being of your family by seeing to it that your life insurance is adequate to pay off any outstanding debts once you are gone.
7. To Pay Estate Taxes
Estate taxes are federal taxes exacted on the value of an estate when the estate owner dies and the estate passes on to a beneficiary.6 Some states have similar taxes. If you have a fairly large estate, the estate taxes could be significant.
As part of your estate planning, you can estimate what your estate taxes are likely to be and cover that amount via the purchase of a life insurance policy. That way, your estate can be passed on to your loved ones free and clear.
8. To Buy a Business Partner’s Shares
If you have a business partner who dies, you could be left in a precarious position, especially if you have joint debts that you will inherit. However, you can provide protection by each partner purchasing life insurance and naming the other partner as beneficiary. That way, enough funds will be available to purchase the deceased partner’s shares and pay off at least a portion of the debts.
9. To Pay Off a Mortgage
It is likely that your home is your biggest investment. If you have a mortgage, though, it will not go away when you die. Someone will have to continue making the payments or the property will be subject to foreclosure. However, if you have sufficient life insurance when you die, the proceeds can be used to pay off the mortgage.
In some cases, you can purchase a special type of life insurance known as mortgage life insurance, which has unique benefits. For one thing, mortgage insurance can usually be acquired as part of the mortgage process with no blood tests or physical exams required.7
10. Build Cash Value
If you purchase a type of life insurance known as whole life, you can build up cash value. These instruments are often used in estate planning. A whole life policy is a type of permanent insurance. Although the premiums may be higher, whole life will allow you to cover your final expenses plus leave wealth to your loved ones.8