Life Insurance is one of the most important things to have in your financial life. There is not another product that offers financial protection, flexibility, and in some cases tax-exempt cash growth over time. According to a recent study by LIMRA (Life Insurance Market Research Association), only 6 out of 10 Americans currently own life insurance. While this is a positive number, that still leaves 40% of Americans who are without protection not to mention the benefits offered by life insurance. So let’s examine why people buy life insurance.
The first reason is the death benefit. Every life insurance policy pays a benefit to your survivors. This benefit can be used for many purposes besides paying funeral expenses. Life Insurance can replace the earning power of the policyholder. Many families rely on two incomes to meet their needs. Imagine what would happen if one of those incomes would suddenly and permanently disappear due to the death of a “breadwinner”. The family could lose their house, have difficulty paying monthly expenses, children could suddenly be denied the chance to attend college, and the list could go on. Life Insurance benefit can also be used to meet expenses such as paying off the mortgage, establishing a college fund, and make up for the lost income created by a death.
Another reason people buy life insurance is to take advantage of the cash savings benefits that come with permanent life insurance policies such as Whole Life and Universal Life. Whole Life and Universal Life invest a portion of the premium payments into an interest bearing savings account inside the life insurance policy. The build up in this savings account is called the policy’s cash value which in most cases pays a higher interest rate than a regular savings account. In addition, if the insurance company that issued the policy declares a dividend, it will be credited to the cash value. The policy owner may use the cash value to help pay for educational costs, supplement retirement income, or financial emergencies.*
Life Insurance provides several tax advantages, a third reason why people purchase it.
Death proceeds are received free of income tax. This is a great benefit if estate taxes are involved. In many instances, the death benefit will be used to pay estate taxes. Cash value accumulations inside permanent policies are tax deferred. This means the policyholder will not pay income taxes on the interest or dividend received from the insurance company that issued the coverage. In addition, cash value loans or withdrawals* are free of tax, as long as the policy stays in force.
A final reason people buy life insurance is the flexibility to design coverage that fit the needs of the policyholder at little additional cost. Individual riders can be added to a policy to protect against a variety of occurrences. The most notable riders are the accelerated death benefit, the waiver of premium for disability, and the accidental death benefit. The accelerated death benefit rider allows the insured to access up to 50% of the policy benefit in the event of terminal illness**. Accelerated death benefits are received free of income tax and in many cases are used to cover medical costs. The waiver of premium rider is crucial in the event of disability. If the insured were to become disabled, all future policy premiums are waived and coverage stays in force.** The accidental death rider pays an additional benefit if the policyholder is a victim of an accident, not their fault.
Life Insurance provides many benefits such as protection, savings potential, tax advantages, and flexibility. A well-structured policy can provide peace of mind and be an important part of any financial plan, no matter what stage of life. A knowledgeable life insurance agent and/or financial advisor can help obtain the appropriate coverage.
* Withdrawals and loans will reduce the policy’s death benefit and cash value available for use.
** Certain criteria must be met for these riders to be used.
*** Death Benefit Payments are subject to the claims-paying ability of the insurance company.
