In its simplest form, life insurance is a contract between an individual and an insurance company. The individual agrees to pay a certain amount, known as a premium, regularly. In return, the insurance company pledges to pay a predefined sum of money, called a death benefit, to the designated beneficiaries upon the insured person's death. Life insurance aims to provide financial independence so that loved ones will not bear the financial burden after one's death.
Types of life insurance
Life insurance is designed to protect one's loved ones from the financial burden that often comes from one's death. There are primarily two types of life insurance:
Term life insurance— This type of insurance offers coverage for a specific "term" or period. If the policyholder dies within this term, the death benefit is paid to the beneficiaries. However, if the policyholder survives the term, the policy expires, and there is no longer a death benefit.
Permanent life insurance— As the name suggests, permanent life insurance offers lifelong coverage and has a cash value component that grows over time. There are three main types:
- Whole life insurance— has fixed premiums and guaranteed cash value growth.
- Universal life insurance—offers flexible premiums and death benefits.
- Variable life insurance—allows policyholders to invest the cash value in various investment options, leading to higher growth potential but also greater risk, fees, and charges.
How life insurance can benefit you
Life insurance extends beyond replacing lost income after the death of a policyholder. However, there are other obvious and not-so-obvious ways it can benefit you:
Financial independence— Perhaps the most obvious benefit is the financial independence it provides your loved ones after death. This is especially important if you are the primary breadwinner, as it affords your family the financial resources to cover living costs, debt repayment, and other expenses.
Funeral expenses—One of the less obvious ways life insurance can benefit you is by covering funeral and burial expenses. The average funeral cost can be expensive, and a life insurance policy can help ease this expense, so it doesn't impact loved ones during an already difficult time.
Cash accumulation opportunity—Certain types of life insurance, such as whole life or universal life, offer a cash value accumulation feature. Since the cash value accumulation increases the death benefit in some policies, these policies also serve as a long-term cash accumulation strategy.
Tax benefits— Life insurance policies also come with certain tax advantages. For instance, the death benefit received by the beneficiaries is generally tax-free. In some policies, the cash value accumulation is tax-deferred when taken through a policy loan.
Policy loans come with a repayment plan and an interest rate, decreasing the death benefit until paid back. Be sure to visit a financial or insurance professional before exercising a policy loan to understand how it may impact your situation.
Estate Planning— A life insurance payout can provide liquidity to cover estate taxes and debts and may potentially protect heirs from being forced to sell assets to pay taxes, ensuring your legacy stays intact.
Business Succession planning—The cash value from a permanent policy can fund the buyout of another business owner or fund business operations. In the case of another owner's death, the death benefit can be used to purchase their shares and transition the business to new owners.
Discover how life insurance can add to your life.
Life insurance protects against unforeseen circumstances and offers a strategy to enhance your financial health. Rely on a financial professional to help you discover how life insurance works and its types, and source a policy suited to your life circumstances and financial goals.
Important Disclosures:
Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
LPL Tracking #821099
Sources:
https://www.experian.com/blogs/ask-experian/what-is-life-insurance-used-for/#
https://www.insurancetrak.com/blog-posts/10-unknown-benefits-of-having-a-life-insurance-policy