I’m a financially-conscious millennial, concerned about spending my money on what’s important and opting out of superfluous expenses. I’m also a bachelor. So when I ask myself, “Do I need life insurance?” my instinct is to say no. But further reflection and learning has got me thinking differently lately.
For the most part, life insurance is only useful when you’re dead and gone. It’s a little hard to imagine existence without yourself being part of it. But believe it or not the party goes on without you. The people you leave behind can often face financial trouble in addition to their grief. Can life insurance insurance help? Let’s take a look at what happens after you’re gone and what life insurance does.
1. Funeral and Final Expenses
Funerals are expensive and a burden for the bereaved to organize and pay for. Most likely someone will want to honor your life with a funeral ceremony of some kind. Perhaps a decent casket and burial spot are in order as well. The costs of these routine postmortem purchases can add up. The average funeral costs between $8,000 – $10,000. Without life insurance, this money will have to come from those you leave behind, adding stress to an already difficult time.
A small and very affordable life insurance policy can guarantee that funeral expenses don’t take a bite out of anyone’s budget. Even if comprehensive life insurance isn’t right for you, most everyone can see the benefit of anticipating funeral costs.
2. Paying Off Debts
What happens to your outstanding debt when you die? You may have heard it said that “debt dies with the debtor.” This is only partially true.
Some debt contracts, like federal student loans, offer loan forgiveness if one dies. Student loans from private lenders vary on this issue. If your credit cards are all under your name, your loved ones won’t be bothered if you die owing money.
However, creditors can tap into your estate if you owe them money when you pass. They have no right to bother your heirs or loved ones if you die owing them money unless the debt was shared. But executors can be forced to hand over assets from your estate to debtors in certain cases. This can indirectly affect your loved ones if you planned on leaving them an inheritance.
Life insurance can prevent any complications with debt and your estate. There are even policies like credit life insurance or mortgage life insurance that protect you while you pay off your debt. For example, if you have mortgage life insurance and you die, the balance of your mortgage will be paid off. This can be especially reassuring for young couples who are paying off a mortgage together.
3. Income Replacement
People who support dependents with their income need to consider life insurance the most. A dependent is simply anyone who relies on you financially. This could be your wife, your husband, your children, your parents, a brother, a sister, or even a friend.
When you die your income goes with you. The lifestyle of your dependents must either change drastically or the absent support must be replaced somehow. This is the most common reason to buy life insurance: income replacement for the well-being of dependents.
4. Leaving An Inheritance
Leaving a gift behind for others is a common desire for people when they think about the legacy they will leave. Perhaps you envision leaving an inheritance for your kids, or maybe there’s a charitable organization you would like to gift to. Life insurance is helpful for this. Permanent or whole life insurance policies are what you should look into if you are interested in accomplishing this
Finally, life insurance has distinct tax advantages. Here are four tax-related benefits to consider:
1) Permanent life insurance policies offer deferred growth on your cash value. In essence, cash value investments that are part of permanent life insurance policies are not subject to taxes as they grow.
2) You won’t face any taxes if you decide to withdraw from your cash value. They are technically considered loans that are secured against your cash value.
3) When your beneficiaries collect their benefit after your death, they won’t face any taxes on it. A $1 million dollar policy will deliver that exact amount without any deductions.
4) You can avoid estate taxes through a special trick that estate planners and tax advisors often use. By transferring your policy to another person or trust at least three years before you die, you can insulate this part of your estate from taxes.
You may think of life insurance as a financial tool that’s only relevant in very specific situations. But as you can see, life insurance can be beneficial for a range of needs. You can take out a small policy of $10,000 to cover your funeral expenses or you can get $2 million dollar worth of coverage to safeguard your family’s future. Simply put, there are different life insurance policies to fit everyone’s needs and it may be more essential to your overall financial portfolio than you realize.