Life insurance, also called life assurance, is basically a financial protection. According to Investopedia, the goal of a life insurance is to provide a measure of financial security a family after death.
Before knowing the reasons why you should have one, know that there are two major types of life insurance—term and whole life.
Term Insurance pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.
Whole life or permanent insurance pays a death benefit whenever you die.
Reasons Why You Should Buy a Life Insurance
To secure your family financially from an unexpected death and loss source of income, most people purchase term life insurance as it is the most affordable type. It provides fast, tax-free income to your family if you die.
It is known as the “income replacement” for this purpose. Whether you’re the only provider for your family or you and your spouse share expenses, it is essential to ensure that if something happens to you in the future, the family members will have money for bills and expenses.
Reality check from MoneyUnder30: The earlier you buy life insurance, the more you’ll save. With exemptions, the younger a policy holder is, the less she or he will pay.
Age is one of the most critical factor, and it makes a strong case for buying life insurance as early in life as possible.
One of the most efficient ways to pass asset to the next generation is through life insurance for wealth transfer. It creates a fully valued tax-free asset upon first premium receipt.
By directing a small percentage of the overall net worth, The policy holder, can leverage their money into a relatively large benefit. As time goes on, the leverage offered may be reduced as the non-life insurance assets grow and compound. In this manner, they are allowed to pass assets on to their family or beneficiaries.
4. College Education Funds
As college costs are expected to continue climbing, let an insurance professional help you plan for your child’s education expenses. Life insurance can be vital in helping you save college funds for your children. Whether you’re there or not. Avoid student loans, as much as possible.
Life insurance offers tax advantages. For example in the event of your death, your family members can choose to use the death benefit, that is, income tax-free, to pay education costs. Some types, taking loans against your policy without tax penalties.
For permanent life policy holder during life include these tax-related advantages:
- Tax-deferred growth
For permanent life insurance policies, the gain in the cash value is not taxed until withdrawn. When the policyholder does make a withdrawal, the gains are taxed as ordinary income.
- Tax-free dividends
Upon the death of the insured, the cash value, including the policy’s dividends, is absorbed by the insurance company, and the policy’s death benefit is paid out free of income tax to the beneficiary.
6. Estate Taxes Payment and Liquidity
You need to find a life insurance plan that pays out to the estate after death, covering expenses with the proceeds from the policy. Parents will no longer worry about it. They will no longer resort on selling or even donating their properties to reduce tax.
The proceeds eventually will save the heirs of the burden of paying estate tax. Without the death claim proceeds, the heirs have 6 months to pay the estate tax or else they will be penalized. With surcharge, interest, and all. Worst case scenario would be, the heirs do not have money to pay the estate tax and the properties are in danger of being foreclosed.
Just a few things to consider before investing:
- Credibility of the company, its policies, and of course,
- The financial situation of your family