Many people don’t believe they need life insurance. It’s actually a flexible financial tool that can help you build financial well-being now and in the future.
You don’t necessarily need life insurance if you have never said “I do” or are living on your own without any children.
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Life insurance can offer benefits beyond funeral expenses. If someone is dependent on your income for any reason, you should consider life insurance. This includes providing for your children. However, you can also use it to pay off debts or provide care for loved ones.
Donate money to people you care about
Life insurance, in its most basic form, provides money for your loved ones if you are unable to work. The death benefit can be used to cover final expenses or pay off a mortgage. You might consider life insurance even if you are in your 20s. This is to ensure that your student loan debt does not become a financial burden for your family. You might also want to ensure that your family has enough money for their long-term care and education.
Add another source of retirement income
Permanent life insurance policies, such as universal or whole life, can be a great way to supplement your retirement income. Permanent life insurance lets you accumulate cash value. This is particularly useful if your 401(k) has reached its maximum or you don’t have enough income to make a Roth IRA contribution or a deductible to a traditional IRA. The cash value can be used in any way you like, including to pay for your child’s or grandchilds’ wedding or for unexpected expenses.
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In case of illness, have access to cash
People are right to be concerned about the rising cost of chronic care due to longer life expectancies. A study published in The American Journal of Medicine (2018) found that more than 42% of the 9.5 million people who were diagnosed with cancer between 2000 and 2012 had exhausted their lives’ assets within two years. Some permanent life insurance policies have riders that allow you to access a portion of your death benefit while still alive to cover the costs of terminal or chronic illnesses.
These riders require that you meet certain criteria for chronic illnesses to be eligible for benefits. These accelerated benefits are not intended to replace long-term or disability insurance. However, they can be a supplement. When determining Medicaid benefits, accelerated benefits are often considered income.
Long-term care benefits do not cover the costs of specific care. Living benefits are life insurance riders that allow you to use your benefits in a variety of ways. You can make accommodation at home, purchase groceries, or travel expenses to visit family members. These benefits can reduce or eliminate the amount that your beneficiaries receive.
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Protect your business and business associates
You are responsible for the well-being of your family and any employees. You can minimize the impact on your business if something happens to you, a partner, or a key employee. Life insurance can be used, among other things, to fund nonqualified retirement plans, facilitate the transfer of business ownership and maintain a business’s viability during any transition following the death of an owner/key employee.
Leave a Legacy
You want to leave a significant amount of money to those you love and to causes that you care about, while minimising taxes. A lot of planning strategies use the death benefit from life insurance policies as a funding source for taxes. Your beneficiaries will not have to pay taxes on any money they receive through your life insurance policy, per IRC 101(1)(a). You can make a meaningful donation to charity or an organization that you care about.
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To leave more for your beneficiaries, keep the tax bill low.
You can make a living trust, which owns your life insurance, and provides death benefits to the beneficiaries. Federal gift and estate taxes are quite high — $11.4 million per person (or $22.8million for married couples) in 2019. However, some states have smaller estate taxes (See 9 States with The Scariest Death Taxes). Your heirs could benefit from tax-planning strategies that use life insurance.
There may be a time in your life when life insurance is not necessary. Your assets, savings, and income may be sufficient to cover your expenses even at the end. Your children might be financially independent and not require insurance to cover them against financial hardships. If your estate is small enough to not owe estate taxes, or has sufficient liquidity to cover them, you likely won’t need life insurance.