Reasons to Buy Life Insurance

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Updated: May 22, 2024

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Life insurance is more than just a policy; it's a comprehensive financial planning tool offering numerous benefits, ensuring your family has sufficient financial support when you're no longer around. As John C. Bogle, the founder of The Vanguard Group, once said, "Don't look for the needle in the haystack. Just buy the haystack!" Life insurance is that haystack — a secure investment for a future you may not be a part of but one your loved ones will.

Understanding the purpose of life insurance helps highlight why it can be a wise decision. Exploring the various reasons for life insurance further reveals its significance. Life insurance covers essential aspects of your family's future, from providing financial security to supplementing retirement income.

Life Insurance Basics

Life insurance represents an agreement between a person and an insurance company. The individual pays premiums, and in return, the insurance company commits to paying a specified amount to a chosen beneficiary when the insured individual passes away. The core purpose of life insurance is to offer financial protection against the economic impact of the policyholder's death.

This coverage can include covering final expenses, providing an inheritance or replacing lost income. Policies vary widely, from term life insurance, which offers protection for a specific period, to permanent life insurance, which provides lifelong coverage and even accumulating cash value over time. Understanding these options helps illustrate the reasons for life insurance, emphasizing how this tool adapts to meet individual and family needs.

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"When considering the amount of life insurance to purchase, think beyond just replacing income. Factor in the costs of services the deceased person provided, future educational expenses and any outstanding debts. The goal is to provide a cushion that helps your loved ones maintain their lifestyle and financial stability even in your absence."Laura Adams, personal finance expert and author

Fundamental Benefits of Life Insurance

One of the most compelling reasons to buy life insurance is to provide financial support to dependents when they need it most — after the policyholder's passing. When a family loses a loved one, especially a breadwinner, it can be a double blow: emotional loss and a potential financial crisis. Life insurance steps in to fill this financial gap, offering a lifeline during a time of turmoil by providing funds to cover daily living expenses, settle debts, fund children's education and more.

Here are ten significant benefits that life insurance can provide:

1. Financial Security for Your Dependents

Life insurance provides a safety net for your dependents, ensuring they have financial support after you're gone. For instance, consider a scenario involving a primary breadwinner with a non-working spouse and two young children. If the breadwinner were to pass away without life insurance unexpectedly, the surviving spouse would suddenly bear the financial weight of raising and providing for their children alone. With life insurance, however, the death benefit could replace lost income, ensuring the family maintains their living standards and educational goals. This is often the primary reason for buying life insurance.

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Ensure your coverage amount accounts for all the major expenses your family will need to cover, including day-to-day living costs, education expenses and future financial goals.

"Life insurance is an essential safety net. If the worst were to happen, a payout could help cover mortgage costs and education expenses, replacing your income for your loved ones." — Lorne Marr, Director of Business Development, LSM Insurance

2. Funds for Debts and Final Expenses

Life insurance can also relieve your family from your debts and final expenses. Consider a couple nearing retirement with a still unpaid mortgage. If one of them were to die unexpectedly, the surviving spouse may struggle to meet mortgage payments on a reduced income. A life insurance policy could provide a payout to clear the mortgage and other debts, eliminating this financial stress during an already challenging time.

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Include your outstanding debts and projected final expenses when calculating how much life insurance coverage you need.

"Life insurance can be an important tool for dealing with financial liabilities at the time of grief and loss." — Brian Greenberg, founder of True Blue Life Insurance

3. Inheritance and Estate Planning

Life insurance can also be a practical inheritance and estate planning tool. Let's say a mother wishes to leave her two adult children an inheritance but has little savings. A life insurance policy could enable her to leave a significant financial gift to her children, helping to secure their financial futures.

In the case of high-net-worth individuals, life insurance can be used strategically in estate planning. Suppose an affluent couple has a considerable estate that is subject to estate taxes upon death. A life insurance policy could provide the funds needed to pay these taxes, preventing their heirs from having to sell off assets.

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Talk to a financial advisor to understand how life insurance can fit into your overall estate planning strategy.

"Life insurance is not just a means to protect your family's income. It can also serve as a powerful tool for creating an inheritance or funding estate tax liabilities." — Chris Huntley, co-founder of JRC Insurance Group

4. Investment Opportunities

Certain types of life insurance, like whole and universal life, offer a cash value component that can serve as an investment vehicle. For example, a young, high-earning professional who has already maxed out their other tax-advantaged retirement accounts might use a universal life insurance policy as another way to save for retirement. The policy's cash value can grow over time, providing funds you can access later in life.

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Understand the pros and cons of using life insurance as an investment before deciding whether it's right for you.

"The 'living benefits,' including the ability to grow a tax-advantaged cash value within a life insurance policy, can provide financial benefits during your lifetime in addition to the death benefit." — Pamela Yellen, financial security expert and author of The Bank On Yourself Revolution

5. Charitable Contributions

Life insurance can be a means of making a significant charitable contribution. A philanthropic individual with a modest income might be unable to make significant charitable donations during their lifetime. However, by naming a cherished charity as a beneficiary on their life insurance policy, they could leave a substantial legacy to a cause they care deeply about.

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Be sure to name a charity directly as a beneficiary on your life insurance policy to ensure the funds go where intended.

"A gift of life insurance can be a thoughtful way to make a significant charitable donation to a cause you care about deeply." — Chris Hogan, personal finance expert and author

6. Business Succession and Continuity

Life insurance can be an essential tool in business planning. If a business owner passes away, the death benefit from a life insurance policy can help ensure the continuity of the business. It can provide funds to hire a replacement, buy out the deceased's share or ease the transition during instability.

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Consider buy-sell agreements funded by life insurance to ensure business continuity after the death of an owner.

"Life insurance can be a significant factor in the continuity of a business, helping it survive through crises and transition periods." — Todd Katz, Executive Vice President, MetLife

7. Borrowing Power Enhancement

The cash value of a permanent life insurance policy can enhance your borrowing power. You can borrow against your policy's cash value, often at a lower interest rate than conventional loans. This can be particularly useful in times of market volatility when you don't want to liquidate other investments.

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Be careful not to overborrow against your policy's cash value, as it could reduce your death benefit.

"Life insurance can do more than cover financial risk after death; it can also provide financial flexibility during your life." — David Woods, former CEO and President of Life and Health Insurance Foundation for Education (LIFE)

8. Help With Savings

For individuals who struggle with saving money, a cash value life insurance policy can act as a form of "forced" savings. With each premium payment, a portion goes towards the cash value, which you can access in the future for any purpose.

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Understand the fee structure and potential surrender charges before considering life insurance as a savings tool.

"Life insurance isn't just about protection; it's also about disciplined saving. The cash value component can help policyholders accumulate wealth over time." — Suze Orman, personal finance expert

9. Supplement Retirement Income

You can structure a life insurance policy to supplement your income during retirement. You can access the cash value component in a permanent life insurance policy tax-free up to the amount paid in premiums. Some people "overfund" their policies to increase the cash value and provide a tax-advantaged income stream during retirement.

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Be sure to fully understand the tax implications of withdrawing from your policy's cash value.

"Life insurance can be structured in a way that it not only provides risk cover but also provides for a regular income during your retirement years." — Douglas Andrew, financial strategist and author of Missed Fortune

10. Care for a Loved One With a Disability or an Aging Family Member

Life insurance can ensure the ongoing care of a family member with a disability or an aging relative. It can provide the necessary financial resources to maintain their quality of life and cover the costs associated with long-term care, medical expenses or in-home assistance.

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Regularly review and update your life insurance policy to ensure it meets your current needs and those of your family.

"Buying life insurance is not only a sound financial decision but a testament to our love and care for our families. It's about providing them with the financial security they would need when we are no longer around to do so." — Byron Udell, founder and CEO of AccuQuote

Each person's needs are unique, and different types of life insurance policies can address these diverse objectives. It may help to speak with a qualified insurance professional or financial advisor to understand what kind of life insurance best suits your circumstances and goals.

Life Insurance Types and Benefits

Understanding the life insurance policies available can seem complicated. To simplify things, we've broken down the main benefits of term life and permanent life insurance. These are two popular types of life insurance, and we'll show how they can meet different needs, whether you're planning for your financial goals or your family's future.

Term Life Insurance Benefits

  • Affordability: Term life insurance is generally much cheaper than permanent life insurance for the same death benefit amount. This affordability allows individuals to get substantial coverage when the need is greatest, often during their prime working years.
  • Simplicity: Term life insurance is straightforward — you pay premiums for a specific term, and if you pass away during that term, your beneficiaries receive the death benefit.
  • Income Replacement: One of the main reasons for having life insurance is income replacement. Term life insurance is typically purchased to replace lost income during working years. This can provide a safety net for your dependents, enabling them to maintain their standard of living.
  • Debt Protection: If you have significant debts, such as a mortgage or student loan, a term life policy can cover these debts if something happens to you during the term.

Permanent Life Insurance Benefits

  • Lifetime Coverage: As the name implies, permanent life insurance provides coverage for your entire lifetime as long as you pay the premiums. This lifelong coverage is a significant advantage for those who want to ensure a death benefit for their heirs no matter when they pass away.
  • Cash Value Accumulation: Permanent life insurance policies have a cash value component that grows over time. You can borrow against it, providing a potential source of funds for various purposes.
  • Tax-Advantaged Growth: The cash value in a permanent life insurance policy grows on a tax-deferred basis, which can lead to significant accumulation over the long term. This supports the purpose of life insurance as a financial planning tool.
  • Flexible Death Benefit: Some types of permanent life insurance allow you to adjust the death benefit (within certain limits) as your needs change over time.
  • Potential Dividends: Some types of permanent life insurance, particularly whole life policies issued by mutual insurance companies, may pay dividends. You can use these dividends to reduce premiums or purchase additional coverage. You can also leave them to accumulate interest.
  • Estate Planning: You can use permanent life insurance as an estate planning tool. The death benefit can provide funds to cover estate taxes, keep a family business running or leave a legacy for heirs or charity.

Remember, the best life insurance for you depends on your circumstances, financial goals and the needs of your dependents. It's a good idea to speak with a qualified insurance professional or financial advisor to discuss your situation and help determine the most suitable coverage.

How to Buy Life Insurance

Purchasing life insurance involves understanding your needs, exploring options and making informed decisions. Here’s a guide to help navigate through the process:

Assess Your Coverage Needs

Evaluate your financial situation and determine how much coverage is required to support your dependents. Consider debts, income replacement and future obligations like education or retirement.

Research Policy Types

Explore different types of life insurance policies, such as term life or whole life. Each has unique features, benefits and costs. Understanding these differences will help you select a policy that aligns with your goals.

Compare Insurance Providers

Investigate various insurance companies. Look at their policy offerings, premium rates, claims settlement ratios and customer service. Comparing providers helps in finding a reliable company with competitive rates.

Consult With a Financial Advisor

You may seek advice from a financial advisor or insurance agent. They can provide insights, clarify doubts and help tailor a policy to fit your specific needs and financial goals.

Undergo the Medical Examination

Most life insurance policies require a medical exam. This helps the insurer assess your health risk and determine the premium rates.

Review and Purchase the Policy

Carefully review the policy terms, conditions and benefits. Once satisfied, complete the purchase process by signing the policy documents and setting up premium payments.

Regularly Review and Update Your Policy

Life circumstances change, so it’s helpful to review your policy periodically. Ensure it remains aligned with your current needs, adjusting coverage as necessary.

FAQ About Reasons to Buy Life Insurance

Explore common questions about the purpose of life insurance to familiarize yourself with how this financial tool can benefit you and your loved ones.

What is the purpose of life insurance?
Why do you need life insurance?
Why do some people get life insurance and others don't?
What factors should you consider when buying life insurance?
How do you buy life insurance coverage?
How much life insurance coverage do you need?

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About Mark Fitzpatrick

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Mark Fitzpatrick has analyzed the property and casualty insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. Currently, he leads P&C insurance content production at MoneyGeek. Fitzpatrick has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.

Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.