Why do we buy life insurance?
What is life insurance?
Life insurance is a contract between you and an insurance company where the insurance company promises to pay a death benefit in return for a monthly premium from the policy owner. The death benefit proceeds from the policy can serve many purposes.
Why do we buy life insurance?
We buy life insurance to protect another party, (your beneficiary), from financial loss resulting from your death. While you can purchase insurance for business purposes, most of us will be looking to protect our family, our loved ones from the loss of our income and to pay for funeral expenses.
Everyone has a different situation and different use for life insurance
Which is your greatest perceived need for life insurance?
According to the National Funeral Directors Association, the average cost of a funeral is about $7,040. This includes the cost of transfer of remains, embalming, metal casket, and other basic services. As many families as I’ve helped find the right final expense protections program I can’t count how many times I’ve witnessed others scramble to raise the necessary funds to bury a loved one. Even if you opt for cremation, you’ll save money but will still find yourself paying a pretty penny. When you pass away, the emotional stress that those left behind in inevitable, don’t leave them with financial stress.
For most of us, the largest financial gift that we’ll have the opportunity to give will be upon our departure. That being said, you can use life insurance for tax free gifting to your family. I worked with countless families who desired to leave children and or grandchildren a financial legacy. The purposes may vary future education or just a tax free cash gift to be that leg up you never had.
Legacy gifts can also be left to charitable organizations, fraternities or even your church or other religious institution.
When you speak of final expenses, most only think of the funeral. The fact is, if you owned assets at the time of your departure, there are like taxes to be paid by the beneficiaries. Inherited IRA’s, bank accounts, real estate are all going to likely have inheritance taxes that need to be paid. You can use the tax free death benefit from life insurance to offset any taxes dues on your estate.
Let’s face it, federal, state and local taxes are going to have to be paid, your life insurance can make sure your heirs get the full benefit of what you worked your whole life to build.
Real Life Example
I once worked with a woman who had a universal life policy with a death benefit of $55,000. This was designated to go solely to her grandchildren. This woman is very involved with her church and sorority. During the course of our conversation she revealed that she would like to leave money to both organizations after her passing, but did not wish to take away from the $55,000 she planned to leave to her grandchildren. I reviewed her policy and found a carrier that could provide her with a $75,000 death benefit for exactly the same price she was paying for her old policy. Now she has an additional $20,000 that she will be leaving to her church and sorority without reducing her gift to her grandchildren.
I’m young, I don’t need insurance yet
I’ve found in the course of my practice that this is how many people really think. Chalk it up to that feeling of invincibly we all feel in our youth. The fact is the younger you are the less expensive coverage usually is. From a personal standpoint, I’ve had three friends pass away suddenly. Two of them in their mid-thirties and the other passed in his early forties. All have young children who still need food clothes and shelter that need to be paid for. They still have college funds that need to be contributed to and ultimate college to pay for. And spouses who still have to pay mortgages, car notes, and utility bills all with one less paycheck in the house.
None of us know when our time will come, it is always better to be prepared.
It’s not for you; it’s for your loved ones
While there are insurance contracts that are designed to be somewhat of an investment vehicle, on average we buy life insurance not for ourselves but for the benefit of those we will leave behind upon death. It is an important tool that everyone should have in their overall financial portfolio.
This is not intended to be tax or legal advice from Dennis Morrison-Wesley or Reliable Retirement Resources, LLC. Please consult your tax advisor or attorney for advice in your specific situation.