In life, there are many financial milestones in life to prep in advance for—things like, paying for college, buying a home, and saving up for retirement. On top of big planned expenses, it can help to be prepared to pay for unexpected events too.
After all, life can veer from the best laid plans. Sudden home repairs, costly illnesses, or even death can take place. And, each of these “unplanned” events can come with a hefty price tag attached.
Life insurance is one option for building up more financial security to protect family, loved ones, and a business before and after an individual’s death.
However, only 60% of Americans have life insurance. And, nearly one in five policyholders do not feel sufficiently insured.
Before getting started, there are some life insurance basics to be aware of to make the right choice for your needs.
If you’re already covered by health insurance, you might be wondering why life insurance is important?
Reasons Why Life Insurance is Important
Here are eight reasons why life insurance could be the right decision for you and your loved one’s financial future:
1. Paying Off Debts
Millions of Americans accumulate some level of debt throughout their life. Taking out a mortgage and student loans are some common forms of debt that can be part of a sound financial plan.
Other types of revolving debt, such as credit card debt, can be riskier due to high interest rates and potential harm to credit scores (when balances don’t get paid off). In fact, the average American has around $6,200 in credit card debt.
When someone dies before outstanding debts are paid off, the money owed may financially burden their estate, family and heirs.
While not every outstanding debt is the responsibility of heirs, cosigners or joint account holders of the deceased could be liable for paying the remaining balance. (It’s important to note that every US state has distinct laws that govern how unpaid debts get prioritized after a person’s death).
There are some cases where young people without dependents may also be interested in life insurance. For instance, when a parent or guardian is a cosigner on a student loan, taking out a life insurance policy on the adult child could cover the remaining educational debt in the event of the parents’ untimely deaths.
Generally, the life insurance premium paid by younger policyholders can be lower than those charged to middle-aged or older individuals.
Life insurance may provide a financial safety net for loved ones left holding the bag on paying off debts. For some, it could prevent certain scenarios, such as needing to sell the family home to balance the debt books in the wake of a death.
2. Giving Loved Ones a Financial Future
Sparing family and dependents the burden of debts could prevent financial hardship if the worst were to happen. However, preparing for future expenses can be important too, especially for people with children and dependents.
Life insurance can help fill the income gap (and supplement added expenses) when one parent or the primary family breadwinner passes away. A death benefit could be used to cover day-to-day purchases and living expenses, such as groceries, utilities, and car payments.
Paying for a child’s education is another major expense that parents might save up to contribute to. Four-year college isn’t cheap, so this may come as no surprise.
On the lower end, in-state tuition at a four-year college averages $9,970, whereas attending a similar private university costs $34,740 on average. A life insurance payout could be applied towards a child’s or multiple children’s college education.
Other dependents, such as aging relatives or children with special needs, may need long-term care that can be covered by life insurance benefits, when an eligible policyholder passes away.
3. Leaving an Inheritance
There’s a lot of work that goes into making and saving money. So, it’s understandable to want to pass on as much of one’s hard-earned cash and assets as possible to loved ones or to a charitable cause. Compared to stock market investments, life insurance can be less susceptible to value fluctuation.
Life insurance is one method to create an inheritance that, usually, is not taxed before reaching heirs or beneficiaries. (There are exceptions here, including when interest is received and when the beneficiary is certain types of estates. Check the IRS for more details ).
Policyholders can name multiple beneficiaries and how the inheritance should be allocated between them. For example, the death benefits could be split evenly between surviving children or a portion could be directed to a charity or nonprofit organization.
Additionally, contingent beneficiaries can be named to receive the death benefits if a primary beneficiary passes away or is unable to claim them.
4. Providing Extra Support Through Retirement
There are a variety of ways to prepare for retirement. Opening an individual retirement account (IRA), using a 401k savings programs, or simply sticking to a budget are some common methods.
Many people only associate life insurance with death, but the right policy can also fit into the mix for retirement planning. Permanent and whole life insurance last the policyholder’s lifetime and often incorporate a “savings” component, known as cash value.
With such policies, the cash value can be withdrawn or taken as a loan to supplement income during retirement or be put towards long-term care services.
Nearly 70% of people living past the age of 65 can expect to need some form of long-term care. Securing funding through life insurance for medical and non-medical care—in the event of an illness or disability—could make a difference in quality of life.
5. Protecting a Business
If a business owner or partner in a joint venture passes away, their employees and business partners could be left out to dry.
Fortunately, life insurance can infuse some financial certainty and be an asset to a business. For one, life insurance benefits could give a cash boost to keep a business afloat while things get settled.
Creating a buy/sell agreement between business partners is another possible option. In this scenario, a life insurance policy is taken out on each partner, usually to equal that person’s share in the company.
If an insured partner dies, the surviving partner(s) will have the cash necessary to buy out the heirs’ share of the business. This may enhance the financial security of all parties involved, including their families.
A business owner may also use certain types of life insurance policy to borrow money against. Keep in mind that only whole or permanent life insurance policies are eligible for cash value accrual.
These types of policies generally carry higher premiums. But, because policyholders pay a greater amount than the death benefit, the insurance company can accumulate cash value. (Some policies may guarantee a specific cash growth amount, while others tie the cash value to current interest rates or invest in subaccounts).
There is no approval process or credit check for such a loan, since the policyholder is borrowing from funds they’ve already paid into the policy. However, some insurance policies in this category can come with “cash out” fees or charge interest on the amount borrowed from the insurance policy.
6. Handling End-of-Life Expenses
When someone dies, their family and loved ones may have to take on settling their affairs and planning a funeral while grieving a loss.
Including end-of-life expenses in a life insurance policy could spare loved ones more money and heartache. Costs vary between funeral homes and geographic areas, but it’s not uncommon in the US to pay between $7,000 to $10,000 for a funeral service, burial, and headstone.
Informing chosen beneficiaries that they’re designated on a policy can help the life insurance claims process run more smoothly. They’ll need a certified copy of the death certificate to then submit the requisite paperwork.
7. Preparing For the Unexpected
Conventional wisdom says to have a rainy day or emergency fund to be prepared for unexpected events like losing a job or a car breaking down.
While various types of insurance can protect and compensate for damage to your valuables and home, there is no price that can be put on someone’s life. Still, death is one of life’s certainties. And, life insurance is one tool for having a financial plan in place when death comes.
An applicant’s health and age can factor (among various considerations) into the pricing of life insurance premiums. Thus, waiting until a serious illness arises may inhibit securing a favorable life insurance plan, or one at all.
8. Offering Confidence
While planning in advances for one’s own death may feel a little morbid, making a plan for what would happen after a sudden death can give some individuals peace of mind that their loved ones will be taken care of.
According to a Federal Reserve survey, 39% of Americans would not be able to pay for an unexpected $400 expense between cash, savings, or a credit card by the next statement.
Additionally, 12% of respondents said they would not be able to cover the cost by selling possessions either.
The loss of a primary earner or caregiver could destabilize many families with the combination of added costs and less money coming in. Even a modest life insurance policy could help fill the income gap during such difficult times.
Thinking About Life Insurance Options?
Every person’s financial situation is different. Knowing why life insurance is important for your own financial plan could be helpful in choosing a policy that best fits your needs.
For instance, choosing between a term vs. whole life insurance policy will impact how much you might pay in premiums, length of coverage, and what expenses are covered for beneficiaries.
To help get started, this calculator can estimate how much life insurance coverage you might need based on your financial goals and situation. Afterwards, SoFi’s Protect’s insurance partners at Ladder will follow up to see if you qualify for an offer.
Qualifying customers can begin their policy right away and cancel at any time. What’s more, life insurance through SoFi Protect does not carry change fees, allowing you to adjust your coverage to suit your changing needs.
Ladder offers term policies in New York (policy form # MN-26) that are issued by Allianz Life Insurance Company of New York, New York. Term policies are issued in all other states and DC by Fidelity Security Life Insurance Company®, Kansas City, MO (policy form No. ICC17-M-1069, M-1069 and Policy No. TL-146). Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
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