Q

What are the benefits of life insurance?

A

Life insurance provides a tax-free payout that protects your family's financial health if you die.

Rebecca Shoenthal author photoHeadshot of Policygenius editor Nupur Gambhir

By 

Rebecca Shoenthal

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

 & Nupur Gambhir

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Updated January 31, 2022 | 2 min read

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Life insurance provides cash to your dependents when you die. This money replaces the income you provided and can be used for anything — funeral expenses, living expenses, college tuition, mortgage payments, and even everyday bills and expenses.

This benefit protects your family's financial health. You can also add on other benefits, such as riders, to pay out to you while you are alive and protect your finances in unique situations.

Financial benefits of life insurance

When you buy a life insurance policy, a robust enough policy won't just cover the basics — it'll cover your dependents' future and standard of living, too.

"We typically recommend people aim for 10 to 30 times their income in life insurance," says Nicholas Mancuso, senior operations manager of Policygenius' advanced planning team. This amount ensures your beneficiaries are covered for the long term.

Because a life insurance benefit is a tax-free lump sum of money, your family can use the cash however they wish, including:

  • Housing costs, including paying off a mortgage or paying rent

  • Other debts, like student loans, credit cards or car payments

  • Existing or future college education costs for your children

  • Childcare

  • Replacing financial support you provided

  • Everyday costs – including food, transportation and healthcare

  • Vacation

Benefits of term life insurance

There are several types of life insurance, but term life insurance is the best choice for most people because it is the most affordable. A term policy is meant to last until your debts are paid off (generally a 20- to 30-year period while people depend on you most). The benefits of a term life plan include:

  • The cheapest life insurance you can buy.

  • If you buy term life insurance when you’re in your 20s, 30s, or 40s, you can lock in low rates.

  • Term life insurance is purely an insurance product and doesn’t have a savings or investment component. This is a good thing — investing and saving on your own yields higher returns.

  • If you have a term life policy and no longer need it, you won’t lose anything more than the premiums you’ve paid.

→ Learn more about term life insurance

Benefits of whole life insurance

Alternatively, whole life insurance is a permanent insurance product that combines investing and life insurance. Once you buy a policy, as long as you continue to pay premiums, you are covered until you die. According to Policygenius data, whole life insurance is much more expensive than term — sometimes as much as five to 15 times the cost. But for certain people with niche financial needs, it also has its own benefits:

  • Combines life insurance with a savings-like component called the cash value.

  • The cash value component can be used as part of a complex estate planning strategy.

  • Works as a forced savings vehicle.

  • You can take out loans against the cash value portion.

→ Learn more about whole life insurance

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Benefits of life insurance riders

You can make your life insurance coverage even more robust by adding life insurance riders. Riders are optional add-ons to a life insurance policy that provide some coverage in unique situations. Here are some rider options for you to consider when you buy life insurance:

  • Disability income rider: This provides you with a monthly stipend if you become unable to work due to a disability.

  • Waiver-of-premium rider: If you become disabled, you can keep your life insurance policy and have your payments waived until your disability ends.

  • Term conversion rider: This allows you to convert your term life insurance policy into a permanent life insurance policy.

  • Accelerated death benefit rider: If you’re diagnosed with a terminal illness, you can get all or part of the death benefit paid out before you die.

  • Long-term care rider: If you require long-term care, such as a nursing home, this rider takes money out of your death benefit to pay for the expenses.

The most obvious benefit of life insurance is the tax-free cash payout for your loved ones if you die. Financial protection is the most important asset life insurance provides for you and your family.

But there are other major benefits, depending on the type of life insurance policy you buy and which additional riders you select. Your specific policy should be the most beneficial to you and your financial needs, so shop around and compare policies to see what’s best for you.

Frequently asked questions

What are the pros and cons of life insurance?

The biggest benefit of life insurance is financial protection for your loved ones if you die. However, you do have to pay monthly premiums for this peace of mind, which can be expensive if you’re in poor health or purchasing coverage when you’re older.

How do I know if I need life insurance?

If anyone depends on you financially (such as your spouse, children, or a business partner), you need life insurance. The same is true even if you’re not the primary earner. Stay-at-home parents and caretakers provide vital services that would require outsourcing if you’re gone.

What does life insurance cover?

Life insurance covers almost every type of death – from accidental deaths to natural causes. As long as you’re honest about your health and hobbies when you apply and you pay your premiums on time, your family will be covered if something happens to you. Some policies even pay out before you die, to help cover the costs of end-of-life care.