It’s not often that life insurance comes up in our everyday conversations. That means a lot of people have questions about life insurance including whether it’s right for them. You may also be wondering, what does life insurance cover? Taking a moment to understand these details may be an important step to help you figure out what kind of coverage you need and how life insurance fits into your long-term financial goals.
Quick Links
- The Role of Life Insurance
- 7 Ways You Can Use Life Insurance
- Additional Protections Offered by Life Insurance
- Life Insurance Policies that Bring You Peace of Mind
The Role of Life Insurance
Life insurance serves as a critical financial tool providing protection and support to individuals and their loved ones in the face of life's uncertainties. At its core, the primary role of life insurance is to offer financial security by paying out a death benefit to designated beneficiaries upon the insured individual's death. This death benefit can then be used to cover a range of expenses, which is a helpful tool when navigating the death of a loved one, especially if they were the primary breadwinner.
Additionally, life insurance can offer valuable benefits such as tax advantages, asset protection, and estate equalization. Depending on the type of policy chosen, you might also have the opportunity to build cash value over time, which can be accessed during your lifetime through policy loans or withdrawals to supplement retirement income, fund education expenses, or address other financial needs.
Overall, life insurance serves as a fundamental aspect of financial planning, offering peace of mind and protection to you and your families against life’s uncertain moments. And, by understanding the role and benefits of life insurance, you can make informed decisions that align with your financial goals and provide for the long-term security and well-being of your loved ones.
7 Ways You Can Use Life Insurance
Life insurance is probably more versatile than you think. In reality, most people have a wide range of financial goals as they grow older, and life insurance can help meet those goals. No matter how you choose to allocate payouts from life insurance, it’s an excellent way to ensure financial security for your loved ones after you’ve passed. Let’s take a look at some of the ways beneficiaries tend to use life insurance payouts.
1. End-of-Life Expenses
The most common use of a life insurance policy is to cover funeral and burial costs. While these expenses might not be forefront in your mind, they can be substantial. According to the National Funeral Directors Association, a funeral with viewing and burial often costs the family close to $8,000. Providing funds for your final arrangements frees your family from the financial burden of planning your funeral and allows them to focus on how they would like to honor your memory.
2. Mortgage
If you die before your home is paid off, a life insurance policy can help your partner make ongoing mortgage payments without your income. Many people choose to purchase policies that cover the initial purchase price of their homes. This can allow surviving family members to buy the property outright, relieving them of the burden of making a mortgage payment every month while allowing them to remain in the home.
3. Monthly Bills and Everyday Expenses
Of course, the mortgage isn’t the only recurring cost your loved ones would have to cover in the event of your death. Depending on how much your family relies on your income to meet household expenses, they may struggle to make any rent or car payments, pay utility bills, and keep stocked up on groceries in your absence. A life insurance policy can give your family a financial cushion to help pay those expenses while they build their financial independence.
4. Co-Signed Debts
When you die, most of your debts don’t die with you. If anyone has co-signed on a loan with you, the co-signer will be liable for paying off the outstanding balance. Even if you do not have a co-signer, your estate will be responsible for your debt. This reduces the amount of assets that can be passed on to your loved ones and, in some cases, can leave them on the hook for balances that your estate can’t cover.
Consider any credit card debt, car loans, and private student loans you have when determining how much life insurance coverage you need. The laws of your state will determine how much of this debt will automatically become your spouse’s responsibility in the event of your death.
5. Child-Related Costs
Whether you’re a family breadwinner or a stay-at-home parent, your contribution is critical. If only one of you is left to care for young children and earn an income for the family, they will need some help.
Life insurance can provide funds for quality child care to help your spouse and your children through the difficult transitions they will need to make. When your children reach college age, your life insurance benefit can help them meet the increasing costs of higher education.
6. Lost Income
Life insurance proceeds can help mitigate the financial strain that results from the loss of income by providing a source of funds to maintain a certain standard of living. Depending on the policy's coverage amount, beneficiaries can receive a lump-sum payment or regular installments, offering them stability and peace of mind during a challenging time. This financial support allows grieving families to focus on healing emotionally without worrying about immediate financial burdens.
7. Financial Gifts and Inheritance
Beyond end-of-of life expenses, income replacement, and child-related costs, life insurance can also be used for charitable contributions and inheritance. If you have philanthropic goals, life insurance offers a strategic means of leaving behind a lasting legacy by designating charitable organizations as beneficiaries.This approach allows policyholders to make a meaningful impact on society while also potentially enjoying tax benefits associated with charitable giving.
Additionally, life insurance can facilitate the distribution of assets among heirs, particularly in cases where certain assets, such as a family business or real estate holdings, are not easily divisible. By naming beneficiaries directly through life insurance policies, you can bypass the probate process, which can be lengthy and costly. This streamlined approach can help minimize delays and disputes among heirs, ensuring a smoother transition of wealth to future generations.
Additional Protections Offered by Life Insurance
Life insurance goes beyond benefits provided to loved ones after the policyholder has passed. You might be interested in how life insurance can benefit you now, rather than in the future. Further, there are also ways to customize life insurance policies by purchasing riders, which can add value to any whole life insurance policy.
Living Benefits
Life insurance doesn't just provide financial protection for loved ones after your death; it can also offer valuable living benefits during your lifetime as well. One significant living benefit of life insurance is the cash value component found in some whole life insurance policies.**
As policyholders pay premiums, a portion of those payments accumulates as cash value within the policy, which grows over time on a tax-deferred basis. This cash value can be accessed during the insured's lifetime through policy loans or withdrawals, providing a source of funds for various needs such as supplementing retirement income, funding education expenses, or covering unexpected financial emergencies.
Riders
Life insurance riders are optional provisions or enhancements you can add to your base life insurance policy to customize coverage according to your specific needs and preferences. While these may require additional premiums, they help turn your standard life insurance policy into one that is specifically crafted to suit your unique circumstances.
There are various types of riders available, each serving different purposes and providing unique benefits. A few common riders include:
- Accelerated Death Benefit Rider: This rider allows policyholders to receive a portion of the death benefit if they are diagnosed with a terminal illness or specified medical condition, such as a chronic illness. It provides financial assistance to cover medical expenses or other end-of-life costs while the insured is still alive.
- Waiver of Premium Rider: With this rider, if the policyholder becomes disabled and unable to work, the insurance company waives the premium payments required to keep the policy active. It ensures that the policy remains active, providing continued coverage without the financial burden of premium payments during the period of disability.
- Long-Term Care Rider: This rider provides benefits to cover the costs associated with long-term care services, such as nursing home care, home health care, or assisted living facilities. It can help policyholders protect their assets and preserve their financial security in the event of a chronic illness or disability that requires long-term care.
Life Insurance Policies that Bring You Peace of Mind
Life insurance coverage is an important part of taking care of your family. Even if you can’t be with them as long as you’d like, you can ensure that they have what they need after you’re gone. Even if you don’t know exactly what challenges await you, you can take advantage of life insurance policies now to ensure that your family is prepared for anything.
ELCO Mutual is committed to providing personalized service, and our agents are happy to answer any questions you may have about our policies. To learn more about the different expenses that life insurance can help cover, reach out to one of our independent insurance agents today!
**Please note that ELCO Mutual does not guarantee dividends from life insurance policies. We encourage you to reach out to your insurance agent for additional information.