Why It Matters
- Life can be unpredictable. Having the right life insurance can help ensure financial stability if the unexpected happens.
- Learn how different types of life insurance, such as term and permanent policies, offer unique benefits like income replacement, debt coverage, and even retirement savings.
- Discover how life insurance can aid in estate planning, business protection, and charitable giving, helping you leave a lasting impact and secure your family's future.
Sometimes life has a way of throwing us curveballs – often when we least expect it. But the better prepared we are physically, mentally, and financially, the better the chances we have to not only survive those curveballs but thrive beyond them. One of the best ways to help ensure we’re able to do that is by having the right type, and right amount, of life insurance.
What does life insurance cover?
Certain types of permanent life insurance are designed to be flexible to meet your needs as they evolve over time. While its primary purpose is to provide a death benefit, it can be used for many different purposes: tax-advantaged supplemental income through loans and withdrawals1 federal income tax-free death benefit; and estate planning. The benefits don’t stop there and vary by the type of policy you have. For the sake of this article, we’ll focus on benefits associated with term life and universal life insurance.
What is term life?
Term life insurance lasts a certain number of years, then ends. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. Term life insurance policies are designed to be cost-effective and consideration should be given to the insurer’s financial strength.2
What is permanent life insurance?
Permanent life insurance policies offer a death benefit and can also offer cash value accumulation. The death benefit is what is paid to your beneficiaries when you pass away. Cash value accumulation is a separate component that allows you to access your policy value while you’re still alive through loans and withdrawals if the policy terms allow, and if there are sufficient funds available.1 Permanent life insurance lasts from the time you purchase the policy to the time you pass away, as long as you pay the required premiums to keep the policy in force. Generally, permanent life insurance is more expensive when compared to term life insurance since these policies typically offer additional features and benefits. There are several different types of permanent life insurance, such as whole life, universal life, index universal life, and variable universal life. Because each of these types of life insurance policies has unique features, you should talk to a financial professional to determine if permanent life insurance is right for you, and if so, which policy type best meets your specific needs.
Benefits of life insurance
Some of the benefits of life insurance may surprise you. Here are 9 ways it can help you plan for and protect your future.
1. Protect your loved ones
At a very basic level, life insurance can function as a form of income replacement. Whether or not you’re the main source of income for your family, it’s likely that you help cover the cost of rent, mortgage, groceries, utilities, child care, and other household necessities. For this reason, many insurance experts recommend that people take out a life insurance policy that's at least 10 times their current annual salary. This may help your loved ones maintain their current lifestyle after you’re gone, reducing their financial burden following your death.3
2. Help provide financial reassurance
One of the top benefits of life insurance is the peace of mind that comes with it. There’s an inherent comfort in knowing that your finances are handled. If you have people who depend on your income, such as a spouse, partner, children, and/or aging parents, life insurance may be an option worth considering to help protect their financial well-being in case something happens to you.
3. Help pay off debt
Unfortunately, debt lives on even after we pass away, except for some federal student loan debt. The average American has $104,215, while people from ages 43 to 58 carry even more, with an average of $157,556 in debt.4 Life insurance can be used to help pay off student loans, mortgages, credit card debt, auto loans, and more.
4. Help protect your business
When your business is your lifeblood, you need to have safeguards in place to protect it. Business owners and entrepreneurs can look to life insurance to fund business succession plans. Using life insurance and buy-sell agreements upfront can help ensure continuity of the business. Whether you have two partners or multiple partners, you want to make sure that the business is passed to those who have an interest in it. In addition, life insurance can potentially reduce business taxes, protect against the loss of key staff, and help attract and retain valuable employees.
5. Help pay for college tuition
The costs of college keep rising and it’s up to you to find ways to keep up. The average cost of college varies from around $11,610 per year for a public four-year in-state college to $43,350 per year for a private nonprofit four-year college.5 In addition to providing a death benefit that could be used for education, the cash value in permanent life insurance policies provides access to funds for educational expenses while alive. Families could withdraw some cash value or possibly take a policy loan.1 Withdrawals are generally tax-free as long as it’s less than or equal to the amount of premiums you’ve already paid6, and life insurance policies are not currently counted on the FAFSA as an asset.
6. Help you save for retirement
Since permanent life insurance has a cash value component, you can think of it as a potential source of supplemental retirement income. Life insurance can be a portion of your overall financial plan that allows you to put in net premiums on a tax-deferred basis, and unlike other vehicles, you get to control the flexibility. If properly put together and funded, you can take out a tax-free income over a period to supplement your retirement.1 Of course, it’s important to consider all options for retirement income such as qualified plans, IRAs, the tax treatment of contributions and distributions, and the fees charged for various financial products.
7. Help cover end-of-life expenses
Final expenses can come as a shock to even the most well-prepared family. They can cost anywhere from $6,000 to nearly $10,000 — not including other end-of-life expenses such as medical bills. 7 Your funeral costs may be covered entirely by taking out a final expense insurance policy.8
8. Aid in estate planning
Many people view estate planning as something to be addressed later in life or only after they have accumulated substantial wealth. The reality is that anyone who owns a home, has children, or contributes to a retirement account may benefit from an estate plan. Estate planning is different from end-of-life expenses in that it involves designating how your assets will be distributed among your beneficiaries after your death. Many people fail to realize that some decedants may still owe taxes to the IRS, and including a life insurance policy as part of your estate plan can help them cover these costs so they don’t incur an unnecessary financial burden.2
9. Help with charitable planning
By designating a charitable organization as the beneficiary of a life insurance policy, you may be able to leave an “amplified” gift for the causes you believe in. The premiums paid are only a small portion of the total death benefit paid, which allows you to leave a larger and more meaningful gift for the organizations you want to support. Life insurance can be a great way for you to not only ensure your loved ones are taken care of, but to also make sure you can still contribute to the causes you care about following your death.2
With so many built-in benefits, it’s easy to see the value in obtaining either a term life or permanent life insurance policy to help ensure you and your family’s long-term financial security and well-being.
Things to Consider
- Evaluate your needs: Take some time to assess your current financial situation, future goals, and the needs of your loved ones. This will help you determine the type and amount of life insurance that best suits your circumstances.
- Consult a financial professional: Schedule a meeting with a financial professional to talk about your life insurance options. They can provide personalized recommendations and help you understand the benefits and costs associated with different policies.
- Take action: Once you've identified the type of life insurance that’s right for your needs, don't delay. Apply for coverage and ensure your policy is in place to protect your family's financial future.
1 Loans, withdrawals, and death benefit accelerations will reduce the policy value and the death benefit and may increase lapse risk. Policy loans are tax-free provided the policy remains in force. If the policy is surrendered or lapses, the amount of the policy loan will be considered a distribution from the policy and will be taxable to the extent that such loan plus other distributions at that time exceed the policy basis. Consult with tax advisor for additional information on the tax treatment of loans or withdrawals from a life insurance policy.
2 “Life Insurance: What It Is, How It Works, and How To Buy a Policy,” Investopedia, September 2024
3 “How Much Life Insurance Should You Have?” Investopedia, September 2024
4 “Experian Study: Average U.S. Consumer Debt and Statistics,” Experian, February 2024
5 “Trends in College Pricing and Student Aid,” College Board, October 2024
6 “Cashing In Your Life Insurance Policy,” Investopedia, September 2024
7 “2023 NFDA General Price List Study Shows Inflation Increasing Faster than the Cost of a Funeral,” National Funeral Directors Association, December 2023
8 “How to Use Burial Insurance to Pay for Final Expenses,” NerdWallet, April 2024
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
