According to statistics, 50% of Americans have life insurance, and about 106 million American adults are also underinsured or without insurance. Life insurance goes a long way in safeguarding your family financially should the unexpected happen. Its proceeds can cover outstanding debts, daily expenses, and more.
While life insurance is a smart investment avenue, familiarizing yourself with the various policies you can purchase helps you make an informed financial choice. Term life insurance covers you for a predetermined term, while permanent life insurance covers you for a lifetime, provided the premiums are paid. Here are eight reasons to invest in life insurance.
1. Income replacement
The loss of a loved one, primarily the breadwinner, may result in significant financial challenges. However, investing in life insurance can replace your income to ensure your family goes through times without struggle. Your life insurance policy payout goes to your beneficiaries to cater for the ongoing expenses you handled. If you’re only buying the policy as income replacement, permanent life insurance wouldn’t be necessary because those who depend on you currently might be financially secure even before you retire.
A term insurance policy that is the most affordable and sufficient for your goals remains your only option. When calculating the amount you require to replace your earnings, you can multiply your annual income by the years you wish to cover. Alternatively, leverage a life insurance calculator to estimate the coverage amount. You can also consult a financial advisor for advice on how much coverage to consider for income replacement.
2. Tax savings
While a life insurance policy’s key function is protecting loved ones in case of your death, it can help you manage tax effects to a certain level, mainly permanent life insurance. Life insurance death benefit proceeds aren’t taxable, meaning your dependents will get the payout minus a tax burden hanging over them. Nonetheless, there are exceptions where these benefits may be subject to tax, including:
- Life insurance proceeds are usually paid in one lump sum immediately after you, the insured person, dies. However, if your beneficiaries decide to delay the payment or take it in installments, interest might accrue, resulting in the taxation of the interest paid to the beneficiary
- If the beneficiary dies or isn’t named, the death benefit goes to your (the insured person) estate and becomes taxable together with the entire estate. The resulting tax bill may be significant because state and federal estate taxes may apply
- Where a life insurance policy involves three different people serving various roles, including the policy owner, the insured, and the beneficiary, the death benefits become taxable
3. To pay off debts
Debt repayment can be stressful and financially draining. Investing in life insurance can help ensure the debts you leave behind won’t strain your loved ones, should you unexpectedly. Debts aren’t inherited. Also, insurance laws prohibit creditors from claiming death benefits from your dependents.
However, creditors may take your death benefit if your beneficiaries pass away before you and you don’t name new ones or your estate is listed as the beneficiary. Your life insurance policy may have options, such as cash surrender, credit life insurance, collateral assignment, viatical settlement, and policy loan, which you can use to pay loans.
4. For retirement investment planning
Life insurance policies can be used for retirement, especially those with a cash value element. Since the cash value grows over time, you can use it as an income source during retirement. Life insurance retirement plans are paid through premiums from you, the policyholder, to the insurer.
Part of the premiums is put into the invested cash value account and increases over time. The cash value account can then be withdrawn as income during your retirement. Consider leveraging a life insurance product that can help you create tax-free income. Using life insurance to plan your retirement has its benefits, including:
- Being the only product in your investment portfolio that offers regular investment and assured benefits because life insurance providers eventually absorb the reinvestment risk
- Instilling financial discipline by allowing for regular investment
- Insurance is also one of the best retirement planning instruments for people who seek guaranteed income or have a low-risk appetite
- Giving you the flexibility to invest in the stock market
5. It’s affordable
Most people shy away from life insurance because they think it’s expensive, but surprisingly, it’s affordable. However, premiums vary depending on the life insurance type you purchase, your coverage amount, your health and age, the insurer’s underwriting procedure, and more. Average life insurance rates may also be influenced by gender, weight and height, current and past health, drug use, term length, family health history, substance abuse history, credit, driving record, and criminal history.
6. For peace of mind
Peace of mind is essential for your mental health. Life insurance is crucial if you’re worried about how your demise might financially affect your family. Investing in life insurance as a parent, primarily the primary breadwinner, helps ensure that if you die when your beneficiaries are still young, they’ll have some money to live off and pay debts, including a mortgage or a high credit card debt.
Knowing that your family will be financially taken care of, even in your absence, gives you peace of mind. When calculating the life insurance amount you need for your peace of mind, you can use various methods, such as standard of living, funeral coverage, or the financial obligation method.
7. To build wealth
With a permanent life insurance policy, you can accumulate cash value on top of the death benefit. Using these funds, you can pay premiums, supplement your retirement income, and apply for a loan at lower interest rates than banks give. Cash value builds up as your premiums are divided into three parts: one part goes to pay the death benefit, the policy’s cash value, and the insurance company’s operating costs and revenue. Your cash value continues to grow as you keep paying premiums on your policy and earning more interest. However, the cash value accumulation differs based on the type of policy.
8. To diversify your investment
Life insurance can be used as an investment diversification tool, especially with universal life policies, because they’re tied to a particular product. Depending on the product’s performance, you’ll get dividend payments. Consider reading the fine print before committing to any policy to determine possible returns and risks.
Endnote
Life insurance is an excellent way to cushion your loved ones once you die. Consider investing in life insurance to enjoy these benefits.
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