Life insurance is an important part of building financial security for yourself and your loved ones. It helps cover a number of different expenses, including end-of-life costs, debts, college education, estate taxes and more.
To decide how much coverage you need, start by determining your personal and family goals. Then, work with a financial professional to determine the type of policy that will best meet your needs.
1. Protects Your Family?s Financial Future.
While it may seem like just another way to spend money, it can actually provide many benefits for you and your family. For example, it can help you save for your children?s education and help you pay off debts.
However, the most obvious reason to get a life insurance policy is that it will protect your family?s financial future if you die unexpectedly. This type of policy typically pays a tax-free cash payout to your family in the event of your death, which is why it?s considered a must-have by many. Depending on the policy, there are several other major benefits that you can enjoy, including:
2. Provides a Legacy for Your Children
Leaving a legacy for your children is an important part of building your family’s financial future. Buying life insurance is one way to make sure your family has financial security if you die prematurely.
If you have a child with special needs, life insurance can help pay for the ongoing costs associated with their care. It can also be used to fund a special needs trust to provide a lifetime of support for your child after you die.
Buying life insurance can be an easy way to leave a legacy for your kids and grandkids. This is because life insurance can last a lifetime and it also accumulates cash value with each passing year. This cash value can then be used to fund a variety of things like college savings.
3. Helps Pay Off Debts
Debt is a normal part of life, and it’s often necessary to pay for things like medical bills or mortgage payments.
Not only can it help you leave a legacy for your loved ones, but it can also be used to pay off your debts. This can include debts you may have cosigned for, such as a home mortgage or car loan. In fact, if you’re in the market for a new policy, a financial professional can help you pick the best one to meet your specific needs. You’ll also want to do your homework by researching your options and weighing the pros and cons of each.
4. Helps Pay for a College Education
College tuition costs are rising faster than ever, and families need to plan well for this expense. One option is to establish a 529 plan, a savings account that grows tax-free when used for qualified education expenses.
A second option is permanent life insurance, which can be a useful tool in funding your child?s college education. Whole life insurance policies accumulate cash value on a tax-deferred basis, and they can be accessed as loans or withdrawals once the policyowner dies.
Both 529 plans and permanent life insurance have their pros and cons, so it’s important to determine which is best for your family. Bankrate’s research can help you make that decision.
5. Helps Pay Inheritance Taxes
If your estate is worth a lot of money, it may owe federal or state estate taxes. Life insurance is a powerful tool for paying these taxes, enabling you to leave your heirs the same amount without facing significant financial burden.
The IRS generally takes a hands-off approach to inheritance taxes when it comes to proceeds from a life insurance policy. Unlike income (wages, salaries and tips), capital gains and asset dividends, the proceeds from life insurance are not classified as gross or investment income.
However, if the death benefit from the policy is given to your beneficiaries in installments rather than as a lump sum, they will have to pay income tax on the interest earned on that money. This can have a significant impact on your family’s budget.