Life insurance is a way to protect your family’s financial well-being. It pays a death benefit to your beneficiaries upon your death, helping your loved ones cover funeral costs or large medical bills, or anything else they may need in the future.
You can choose from a range of policies to meet your needs. Consider your age, health and other factors when deciding which policy is right for you.
It pays a death benefit
Life insurance is a way to provide a death benefit for your beneficiaries. This can be a valuable way to help your loved ones cover expenses like funeral costs, debts or education costs.
Before choosing a life insurance policy, consider your needs and long-term goals. For example, do you want a high level of coverage or just enough to cover the cost of funeral and burial expenses? Then work with a financial planner or advisor to determine how much of a death benefit you need.
If you choose a life insurance policy, you may be required to pay monthly premiums. These premiums are typically a small amount and can be added to your budget over time.
You also have the option to add riders to your policy, which may allow you to modify or change the policy. For instance, you might be able to add a critical illness rider if your spouse or child has a serious health issue.
The death benefit you receive from a life insurance policy can be used for anything the beneficiary wants it to go toward. This includes debts, funeral and burial costs, future living expenses and college tuition.
Depending on the type of policy, you can choose to receive a lump sum or monthly or annual annuity payments. Lump-sum payouts are usually tax-free. However, annuity payments are taxable.
If the insurance company allows you to cash out your death benefit, you can use it to fund a retirement account or other investments. Your payout can be a significant source of income for you and your family, but it can also put a strain on your budget.
To begin the process of receiving your death benefit, you must first complete a claim form with the insurer and submit a copy of your deceased policyholder's death certificate. Once the insurer verifies the death and validates your status as a beneficiary, it should process your claim within 30 to 60 days.
Once the process is completed, your death benefit will be paid out to you, or the beneficiaries you named on the policy. These beneficiaries can be a spouse, children, business partners, friends or trusts.
It pays a cash value
In exchange for your premiums, life insurance companies will pay a death benefit to your beneficiaries when you die. This money can be used to cover any expenses you have left behind, such as funeral costs, debt payments or college tuition for your children.
Cash value life insurance is a type of permanent life insurance that builds cash value over time. It offers a death benefit and the opportunity to build savings, but it usually costs more than term life policies that offer no cash value.
Whole life insurance, which offers a guaranteed death benefit and cash value component that accumulates at a fixed rate, is the most simple form of cash value life insurance. Many of these policies also include dividends that can be added to the cash value balance.
Universal life insurance, which is more flexible than whole life, offers a cash value component that grows based on the performance of investment funds of your choice. These policies come with a higher degree of risk than whole life, but they can be more cost-effective for some families.
Some people opt for a variable universal life insurance (VUL) policy, which provides a cash value component that can be invested in an index account. The policy’s cash value can be credited monthly or annually with interest based on an underlying index.
This can result in a higher cash value than the guaranteed rate, but it can also reduce your policy’s death benefit. It’s important to consider your financial needs and goals before choosing this type of policy.
Another negative of cash value life insurance is that it can be difficult to withdraw the accumulated cash value. You must pay a surrender charge when you take cash out or terminate your policy, and the amount you receive can be taxed at a higher rate than what you had before you took it out.
Depending on your tax situation, you might want to consider building up cash value in other ways instead. You could invest in CDs or bonds, for example, or save money in a 401(k) plan.
It pays a tax-free death benefit
When an individual dies, the life insurance policy pays a death benefit to his or her beneficiaries. Generally, these proceeds are income tax-free.
However, there are some situations in which a death benefit can be taxable. This includes when the deceased person’s policy accumulates dividend or interest, when taking out a loan on the life insurance policy, or when selling the policy’s cash value in a life settlement.
These payments may be made in a lump sum, over installments, or as part of an annuity. These benefits can be used to pay for funeral expenses, home renovations, college tuition, and other costs.
The amount of a death benefit will depend on the type of policy you choose. Some policies will pay the full death benefit upon your death while others will pay out an amount based on a percentage of the cash value or the total premiums you paid during the policy’s term.
Some types of policies have riders that allow you to increase the death benefit, receive a higher payout at death, or even buy an accelerated death benefit option. These riders are generally only available to people younger than 60.
Riders can be a great way to customize a policy to meet your specific needs. They can add additional coverage such as accidental death, disability waiver of premium, or life insurance for the terminally ill.
Depending on the policy, these riders can also increase the death benefit by paying out a larger percentage of the policy’s cash value. This is an excellent way to ensure your family will have the financial resources they need after you’re gone.
Another common rider is a return of premium feature that refunds some or all of the premiums you paid at the end of a term period. This feature is often used by parents to provide extra income for their children if the parents are no longer working or unable to work.
In addition, if you have a child or other loved one who needs care and cannot afford it, life insurance can help them maintain their lifestyle until they can support themselves. This can be particularly important if they’re living with a disabled or elderly parent or relative.
It pays a tax-free cash value
Life insurance can help you meet several financial objectives, including leaving a substantial benefit to your loved ones and helping your family achieve peace of mind. You can also use it to plan for retirement and as a gift to a charity or other organization.
Cash value builds up in a permanent life insurance policy, which means the money you pay into the policy is not taxed while it’s growing. This tax-deferred account is often used to purchase more insurance with a higher death benefit, which will leave your beneficiaries with a larger amount of money when you die.
You can borrow against the cash value of a permanent life insurance policy, but it’s not taxed as long as you don’t exceed the policy’s cash value. However, if you fail to repay the loan, it’s considered unpaid income and taxable.
The amount of cash you can withdraw without triggering income taxes is known as the “cost basis.” This is what you paid into your policy when you first purchased it. It includes all the premiums you’ve paid, including any interest or investment gains earned on that cash value.
In contrast, withdrawals greater than your “cost basis” are taxed as if they were taken out of your bank accounts. This can be a big concern if you’re in retirement and you want to tap your cash value to make extra spending and living expenses.
One way to avoid this problem is to withdraw only the cash value that’s your cost basis and not any above-basis amounts based on interest or investment gains. This is also a good rule of thumb for any permanent cash value policy that has become what’s called a “modified endowment contract.”
It’s important to speak with your insurance representative to understand the best ways to access and use the cash value in your life insurance policy. This could include borrowing against it, a partial withdrawal, or trading it for another policy in what’s called a 1035 exchange, free from income taxes.
Regardless of the strategy, it’s important to consult with a qualified tax advisor to ensure that you’re making the most of your life insurance policy and not paying unnecessary taxes. It’s also important to review your policies regularly and adjust them as necessary so that you’re getting the most out of them for you and your family.