Using Life Insurance To Protect Your Loved Ones

Theodora Lee Joseph, CFA

3 mins

Using Life Insurance To Protect Your Loved Ones

Life insurance isn't just another financial product: it's your safety net, ensuring your loved ones are taken care of financially in the unfortunate event of your passing.

Life insurance comes in two primary flavors, each catering to different financial needs and goals.

Term life insurance is a straightforward choice. It offers coverage for a predefined period, and if you outlive that term or decide to halt premium payments, the coverage naturally expires. During this period, you have the flexibility to adjust or maintain your coverage level to suit your evolving needs.

Permanent life insurance, while more expensive, offers lifelong coverage and often includes an investment component. In simple terms, a portion of what you pay each month (a.k.a. your premiums) gets invested, potentially building a "cash surrender value" if you choose to cancel your policy. Your choice depends on your preferences regarding flexibility and risk tolerance, with subtypes like Whole, Universal, and Variable Universal allowing you to tweak both premiums and coverage levels.

The perks of life insurance

The advantages of life insurance extend beyond the peace of mind it offers.

  • Tax benefits: One significant perk is that death benefits are usually exempt from income tax. Imagine you have a substantial life insurance policy, and upon your passing, your beneficiaries receive a sizable payout. This money can help cover any estate taxes, preserving your estate for your loved ones. For instance, consider a scenario where you own a family business. The life insurance payout can ensure that your heirs inherit the business without facing hefty tax bills that could jeopardize its future.
  • Estate planning: Placing your life insurance within a trust can provide added benefits. This strategic move might shield the funds from inheritance tax obligations, and it grants you greater control over the policy's beneficiaries. As an example, let's say you want to ensure that your grandchildren receive a portion of the proceeds. A trust allows you to allocate funds to them directly, bypassing complicated inheritance tax calculations.
  • Tax-deferred growth: Permanent life insurance policies offer another advantage: tax-deferred investment growth. These policies often include an investment component that allows your cash value to grow over time. While alive, you can tap into this cash value, which accumulates without triggering immediate taxes. Consider it a financial tool that can provide additional liquidity or support during your lifetime, whether for unexpected expenses or to fund your retirement.
  • Additional protections: Many life insurance policies offer add-ons known as riders and benefits. These customizable features add extra layers of security to your policy. For example, you can include a critical illness rider, providing a lump-sum payment if you're diagnosed with a severe medical condition. This payout offers vital financial support during a challenging time. Alternatively, a waiver of premium rider allows you to skip premium payments if you become disabled, ensuring your policy remains active when you need it most. These riders enable you to tailor your coverage to your unique needs and provide peace of mind during unforeseen circumstances.

Things to consider before getting covered

Before you jump into the world of life insurance, you've got some decisions to make. Start by figuring out how long you want coverage and at what level. Take a close look at your financial situation to understand how your family would manage without your support.

Life doesn't stand still, and neither should your insurance. Periodic policy reviews are crucial as your life evolves. Changes in income, family size, or financial goals might mean your coverage needs an upgrade. This is where a trusted advisor or insurance specialist can step in, helping you make informed decisions tailored to each stage of life.

Lastly, remember that the strength of your life insurance policy hinges on the financial stability of the company behind it. So, when choosing a provider, choose one with a solid track record and a robust credit rating. Your family's financial future depends on it.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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