Why Life Insurance Is Important

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Updated: May 22, 2024

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Life insurance serves as a safeguard, helping prevent financial difficulties for beneficiaries. It enables them to handle expenses, pay off debts and manage estate taxes using the policy's death benefit.

Typically, life insurance is most beneficial for breadwinners, individuals with significant debts and older adults, ensuring their families can manage end-of-life costs. But even for those outside these groups, life insurance can be a strategic choice, provided they can afford premiums and wish to support dependents financially after passing away. This makes life insurance a valuable tool for financial stability and future planning.

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Key Takeaways

Life insurance is valuable because it allows you to provide for loved ones after you pass away.

Older adults, breadwinners and people with debts may benefit the most from life insurance. Beneficiaries can use the funds to replace income and cover end-of-life costs.

Life insurance may be less beneficial for you if you have a lower income, no debts or no financial dependents.

What Is Life Insurance?

Life insurance is a contractual agreement with an insurance company, providing beneficiaries with financial compensation upon the policyholder's death. It's a tool for managing financial risks and ensuring debts or living expenses do not burden your loved ones after your passing.

Life insurance is broadly categorized into two types: term and permanent. Each type caters to different coverage needs and financial situations.

Term life insurance offers protection for a specific period, making it a cost-effective option for temporary coverage needs. It is particularly suitable for those looking to cover short-term debts or provide for their family during their working years. In contrast, permanent life insurance provides lifelong coverage and includes a savings component, which accumulates cash value over time. This type is ideal for long-term financial planning, offering the dual benefits of insurance protection and a potential source of savings or income in later years.

Why Life Insurance Is Important

Life insurance plays an important role in financial security. It ensures that loved ones are not left with financial burdens in the event of the policyholder's death. This financial safety net, a key reason to get life insurance, can cover funeral expenses, settle debts and replace lost income, easing the transition for families during difficult times.

Beyond immediate financial relief, life insurance can serve as a tool for estate planning, ensuring wealth is transferred according to the policyholder's wishes. It can be a proactive step in protecting your family's future and securing their financial stability.

Benefits of Life Insurance

The primary motivator for getting life insurance is to ensure your family or loved ones have financial resources if you pass away.

They can use the proceeds to pay for major expenses like paying off a mortgage, end-of-life expenses or college tuition. The death benefit is usually tax-free and may be used for estate planning. Permanent life policies have additional benefits like cash value savings to use while you’re still alive, and some life insurance policies may have dividends, which can generate passive income.

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    Fund major life expenses

    One of the main reasons to have life insurance is to cover expenses and debts. If you’re the family breadwinner, your survivors can pay off a mortgage, finance college tuition or avoid working to replace your income. If you’re a dual-income family, life insurance can allow your spouse to take time off from work, enabling the family to grieve while easing financial pressure.

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    Pay for final expenses

    Paying for final expenses, including end-of-life medical bills and funeral or burial costs, can be expensive. Your beneficiaries can use life insurance proceeds to pay these costs. If you have a vision for your funeral, you can make your wishes known while still alive, knowing your loved ones won’t have to pay for the costs out-of-pocket.

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    Provide financial support for estate planning

    If you plan to transfer wealth to the next generation, you can use life insurance as part of the estate planning process. The beneficiary can use the tax-free death benefit to pay for estate taxes, get a faster payout while waiting for asset liquidation, equalize inheritance and prepare for the future.

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    Receive cash value savings

    When you buy permanent life insurance, it comes with a cash-value savings account. Part of each premium payment funds the account, which you can access while alive. The cash value is separate from the death benefit, so it won’t go to your beneficiary unless you buy variable life insurance, which has a face-value death benefit option that includes both the death benefit and cash value.

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    Borrow against the cash value

    There are several ways to use the cash value in a permanent life insurance policy. You can pay premiums with it, withdraw from it or borrow against it. If you borrow against the cash value, there is no credit check or collateral requirement. You don’t have to pay it back, but remember that the borrowed amount will accrue interest. Any outstanding amount will be deducted from the death benefit when you die.

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    May be eligible for dividends

    One advantage of whole life and universal life is the potential for dividends. You may be eligible for a yearly dividend if you buy whole life insurance from a mutual insurance company. You can use the funds from this passive income however you wish, including buying extra life insurance or paying your premiums.

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    The death benefit is usually tax-free

    Another reason to get life insurance is that the death benefit usually passes to your beneficiary federal income tax-free. They can use the money without worrying that some will need to be reserved for taxes. Consulting a tax advisor can help ensure the beneficiary gets full use of the death benefit once it’s made available by the life insurance company.

How Beneficiaries Can Use the Death Benefit

Your life insurance beneficiaries can use the death benefit in many ways. One of life insurance's main benefits is preventing financial losses after a breadwinner's death.

What Life Insurance Can Help You Pay For
Life Insurance Uses
Description

General Monthly Living Expenses

Without the primary income earner, a spouse may be unable to keep up with general monthly living expenses. In the 2023 LIMRA study, 38% of respondents said they would feel the financial effects of the primary income provider being gone within six months of their death, and 30% said they would struggle within a month of the wage earner’s death.

College Tuition

The average cost of college tuition continues to rise. A 2-year institution can cost anywhere from $4,000 to $17,700 per year, while a 4-year school can run between $9,700 and $38,800, according to the National Center for Education Statistics (NCES). Life insurance can help fund your children’s future tuition costs.

Car Loan Payments

Despite lower interest rates in 2023, the average monthly car loan payment for a new car reached $739 per month, according to Edmunds. Monthly payments for a used car averaged $561. The recipient could use the life insurance death benefit to pay the car loan, reducing their monthly expenses and potentially saving thousands in interest.

Mortgage Payments

Another way to use death benefit proceeds is to keep current on mortgage payments or pay the entire balance off. Removing this payment, which may be a household's largest monthly expense, could relieve the financial burden of losing the primary income source.

Fund Retirement

If you have monthly payments under control or are debt-free, another option is to use life insurance to fund retirement for survivors. Working with a financial advisor can help them create a retirement strategy that works best for their unique situation.

Who Should Buy Life Insurance

Life insurance has several benefits, including income replacement and paying off expenses, including medical or burial costs, so your children and grandchildren won’t feel the financial impact of paying for your end-of-life expenses.

Life Insurance Is Best For:

Older Adults

Older adults nearing the end of life can incur medical expenses and may have wishes for their funeral or burial. A life insurance beneficiary can use life insurance to pay for these expenses.

Breadwinners

If you are a breadwinner, your family depends on your income. Your survivors can pay the mortgage or car loan, fund education or replace your income so they can grieve without worrying about finances.

Debtors

The lower your income, the more likely you are to have debt. Your beneficiary can use the life insurance death benefit to pay off debts like a mortgage or car loan so they can keep the asset.

In 2023, the average American had $104,215 in debt. Gen X has the most total average debt, with $157,556. They also have the highest credit card debt, averaging $9,123, and auto loan debt at $27,098 on average. Millennials recorded the highest average mortgage debt at $299,689.

Regardless of your age and generation, you likely have some debt. Whether you have a low income, or you're a breadwinner or an older adult, life insurance can be an option for your loved ones to pay off debt, save for the future or cover your funeral costs.

Who Else Can Benefit From Life Insurance?

Breadwinners, debtors and older adults aren't the only ones who can benefit from life insurance. Exploring the common reasons for life insurance uncovers its broader applicability and critical role in financial planning across different life stages and situations.

Adults with private student loans face a unique financial challenge. Their families or co-signers could be responsible for these loans if anything happens to them. Life insurance can act as a financial safety net, ensuring these debts do not become a burden to loved ones.

Parents who co-sign their children's loans also navigate a different financial landscape. The assurance that life insurance provides, in ensuring that these commitments are met even in their absence, makes it a valuable financial tool.

For business owners, the reasons for having life insurance extend to protecting the entity they've built and its stakeholders. It safeguards against the potential financial upheaval their untimely passing could cause, ensuring business continuity and economic stability for partners and employees.

Parents with young children or lifelong dependents may also find life insurance necessary when creating plans for their financial future. The prospect of leaving their dependents without support can be a powerful motivator in seeking life insurance. It's not just about covering immediate financial needs but securing a future for those who rely on them most.

Reasons to Buy Life Insurance

There are several reasons to get life insurance, with being a breadwinner at the top of the list. Many families will struggle if they lose their primary source of income, and life insurance can provide guaranteed protection from financial devastation. You can also tailor your policy with life insurance riders, which can help pay premiums if you become disabled, buy cheap life insurance for your family or enable you to use some of the death benefits after a terminal illness diagnosis. Here are some other reasons to get life insurance.

1
You’re the only one with an income

The point of life insurance is to prevent financial hardship for your family or loved ones. What would your spouse do if your income were to disappear? Life insurance can enable them to pay off debt, cover education expenses and afford monthly expenses, like child care, health care or home services.

2
You have a mortgage

A mortgage is often the most significant expense people have to pay. Life insurance can allow your loved ones to continue to pay the mortgage or pay it off completely, preventing your spouse from selling the house because they can no longer afford to keep it.

3
You want your final expenses taken care of

The median cost of a funeral with burial and viewing is $7,848. If you prefer cremation with funeral services, the median cost is $6,971. Rather than burden your loved ones with the cost, you can buy life insurance to cover it, ensuring you can have the funeral, service and any extras you want.

4
You want to provide a tax-free benefit to your beneficiary

One of the greatest incentives of life insurance is that the death benefit is usually tax-free for your beneficiary. Whether you choose a loved one, business partner or charity, these tax advantages are hard, if not impossible, to find elsewhere if you want to leave a legacy behind.

5
You want to earn cash value or dividends

Some people gravitate towards whole life insurance to earn cash value and dividends. You can use both while still alive in several ways. If you don’t need dividends and are a savvy investor, you could maximize your cash value growth with an indexed universal life insurance policy.

Reasons to Not Buy Life Insurance

For many, life circumstances make life insurance worth the price. However, not everyone benefits from a life insurance policy. One of the main reasons not to purchase life insurance is if you don’t have anyone else depending on you financially. You also might not need life insurance if you don’t have outstanding obligations that could become someone else’s burden.

1
You don’t have any children

If you don’t have children, life insurance may not be necessary. You don’t have to worry about child care, tuition or the potential for a lifelong dependent if your child has serious medical needs. Single people without children are the least likely group to need life insurance.

2
Your parents have enough income to self-insure

While you could buy life insurance to help your parents out financially with your end-of-life expenses, there may be no need if they have a healthy income to self-insure and wouldn’t face financial difficulty after you’re gone.

3
You don’t have outstanding debt

If you’re debt-free, your need for life insurance decreases tremendously. Most people buy insurance to ensure their beneficiaries can pay off their debts and other expenses. If you’ve been diligent enough to remain debt-free, you might not have a reason to get life insurance.

4
You have a low income

If you have a low income, you might not have debts to pay off, like a mortgage. Although low-income earners can have debt, those who don’t and live within their means usually don’t have much need for life insurance unless they want to buy a small permanent life policy to pay for their funeral and take advantage of cash value or dividends.

5
Your partner is financially independent

Whether you and your partner are married, cohabiting or living separately, if they are financially independent and can continue their standard of living with their income after you’re gone, you probably don’t need life insurance. Without children or debt, the need for life insurance is usually small, if needed at all.

Whether you should buy life insurance is a personal decision. Although you may feel pressure to do so, you don’t have to purchase life insurance. No one can buy life insurance for you without your consent. Weigh your options carefully to decide if buying life insurance is worth it for you.

Where to Buy Life Insurance

If you’re ready to buy life insurance or want to learn more about your options, you can work with an insurance agent or request quotes online. If you’re looking for quality and affordability, we analyzed dozens of carriers to find the best life insurance companies. Consider our cheapest life insurance companies if you are looking for the most affordable options. We also have deep-dive reviews for multiple carriers to help you make an informed decision on the right company and policy type.

Review the Best Options in Your State

Life insurance rates vary based on the type of policy and the benefits you opt for. Review the best options in your state to narrow down your search.

How to Buy Life Insurance

Buying life insurance requires thoughtful consideration and informed decision-making. The following steps can help you secure a life insurance policy that offers the right balance of coverage and affordability.

1
Assess your coverage needs

Determine the extent of financial support your family would require in your absence. Consider debts, daily living expenses and future obligations like college tuition.

2
Explore policy types

Research term and permanent life insurance policies to understand which aligns best with your financial goals and coverage needs.

3
Compare quotes

Obtain quotes from multiple insurers to find the best coverage at a competitive rate.

4
Choose a reputable insurer

Select an insurance company with a solid financial standing and positive customer reviews.

5
Complete a medical exam (if necessary)

Some policies require a medical exam to determine your premium based on your health status.

6
Review and sign the policy

Carefully examine the policy details before signing to ensure it meets your needs and expectations.

7
Designate beneficiaries

Specify who will receive the death benefit, ensuring your policy protects your loved ones.

Compare Life Insurance Rates

Ensure you're getting the best rate for your life insurance. Compare quotes from the top insurance companies.

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FAQ About the Importance of Life Insurance

Life insurance is a practical choice for many people. We answered some of the most frequently asked questions on why life insurance is important.

Why is life insurance important?
Who should buy life insurance?
How should you spend a life insurance death benefit?
When do I need life insurance?

About Mandy Sleight

Mandy Sleight headshot

Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.

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