Q

What are the benefits of life insurance?

A

The purpose of life insurance is to provide your loved ones with financial protection if you die. A tax-free payout is the main benefit, but the advantages of life insurance extend beyond extra cash.

Life insurance provides cash to help your dependents replace your lost income when you die. This money goes to your beneficiaries and can be used for anything — funeral expenses, living expenses, college tuition, mortgage payments or donations to charity.

Death is expensive — the average funeral costs nearly $10,000 — not to mention medical bills after a hospital stay or extended illness. Life insurance can pay for these expenses and any outstanding debts, allowing your family time to grieve without worrying about finances.

Life insurance can also help your family pay the bills if you die. Think about your family’s expenses: if you didn’t bring in another paycheck, what would happen? Could your spouse make up the difference? If you’re a single parent, could your children support themselves? An influx of cash can keep your surviving spouse in their home by covering mortgage payments or covering your children’s existing or future college tuitions. The death benefit may not last forever, but it can help keep your loved ones afloat.

Key Takeaways

  • The biggest benefit of life insurance is financial security for your loved ones

  • A death benefit can be used to pay for anything – from paying off debts to funeral costs to a college education for your children

  • Certain life insurance policy add-ons (riders) can increase the benefits of your coverage

Financial benefits of having life insurance

As mentioned above, the biggest advantage of life insurance is the financial protection it provides your dependents if something happens to you. The more insurance you have, the more beneficial it can be. When you buy a life insurance policy, make sure you have enough to cover the basics (like funeral expenses and end-of-life medical care), but also try to secure coverage for the future too. "We typically recommend people aim for 10-15 times their income in life insurance," says Nicholas Mancuso, senior operations manager of Policygenius' advanced planning team.

Your beneficiaries can use the life insurance to pay for any expenses, 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

  • Income replacement; this can be especially helpful if your loved ones require time off from work to grieve or if you are the breadwinner

  • Everyday costs – including food, transportation and healthcare

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

Benefits of term life insurance

There are several types of life insurance, but the most popular type that makes sense for most people, is term life insurance. Term life insurance 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:

  • Term life insurance is the cheapest life insurance you can buy.

  • If you buy term life insurance when you’re young, 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 — you can increase your returns by investing and saving on your own.

  • If you have a term life policy and can no longer afford it, you won’t lose anything more than the premiums you’ve paid if you decide to abandon the policy.

→ 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 (or build up enough cash value to cover the premiums), you are covered until you die. According to Policygenius quotes from 2020, whole life insurance is much more expensive than term – sometimes as much as five to 15 times the cost – but it also has its own benefits:

  • Combines life insurance with an investment component.

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

  • Works as a forced savings vehicle.

  • You can often take out loans against the cash value portion, although this could decrease your death benefit.

→ Learn more about whole life insurance

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Benefits of life insurance riders

You can make your life insurance policy even more beneficial to you and your family by adding life insurance riders. Riders are optional add-ons to a life insurance policy that provide additional terms and conditions that aren’t included in the standard life insurance policy. 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. This rider can serve as an alternative to long-term disability insurance, though it’s less robust and doesn’t last as long as long-term disability coverage.

  • 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 (less than 12 to 24 months to live, depending on the state), you can get all or part of the death benefit paid out before you die. While this can support your end-of-life care, it could leave your survivors with a lower death benefit.

  • 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.

Benefits of life insurance FAQ

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 to murder. 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.