How Life Insurance Can Help Your Family Cover Expenses That Could Derail Their Financial Future

A financial professional can explain the different types of life insurance available and help you choose the one that best meets your needs. A policy can also include features called riders that give you extra flexibility.

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The cost of life insurance can be less than you think, and it can help your family cover expenses that could otherwise derail their financial future. Several factors influence the cost, including the type of policy, amount of coverage, and whether it includes riders. Term life insurance is typically cheaper than whole or universal life insurance, and it is usually more affordable the younger you are. However, each insurer weighs these factors differently, so it’s best to shop around.

To determine the amount of coverage you need, consider your existing and expected financial obligations. This may include debts, such as mortgages or credit cards; child care costs; and a college education for your children. In addition, you should also factor in inflation. A death benefit of $250,000 today will not be as high as one in a few years, so it is important to select an appropriate coverage amount.

A life insurance policy can provide a lump sum to pay for a variety of expenses, including funeral costs and final medical bills. It can also pay for income replacement and help your family maintain their standard of living. You can find tools online to help you calculate the amount of coverage you need.

Aside from your age, the biggest factor that determines the cost of life insurance is your health. Life insurers evaluate your family history and current health status to determine your life expectancy, and the higher your risk, the more expensive your premium will be. Your weight, smoking status, and dangerous occupations or hobbies can also affect the cost. If you withdraw money from your policy, you will owe taxes on it, and unpaid loans and withdrawals reduce cash values and the duration of your guaranteed coverage period.

Benefits

The primary benefit of life insurance is to provide a lump sum called a death benefit. It may be used to pay a debt, cover funeral expenses, and to replace income that would otherwise be lost by the deceased person. It is also often used to fund a business buy-out, to provide liquidity for estate planning purposes, to indemnify loans and investments in the event of death, and to cover retirement expenses.

The amount of money that will be paid to your beneficiaries depends on many factors, including your age, gender, medical history and lifestyle. The insurer will also evaluate your driving record, criminal record and dangerous occupations or hobbies. Premiums are based on these factors and the insurance company’s calculation of your life expectancy.

You can choose a level term policy, where the death benefit remains the same over a set period of time. Alternatively, you can choose an increasing term policy that increases the death benefit at stated intervals. Some policies have a cash value, which is money that accumulates over the course of the policy, similar to a savings account. This money can be borrowed or withdrawn, and it is taxed at a lower rate than the original premiums were.

The beneficiaries of a life insurance policy are the people who will receive the death benefit. They can be one person or a group of people or entities (e.g. a family trust). The beneficiary can also be a charitable organization. The policyholder can also choose a secondary beneficiary in case the primary beneficiary dies before receiving the death benefit.

Taxes

Life insurance proceeds are not taxable in most cases when they are used to pay for other expenses. However, it’s important to understand the tax implications of your life insurance policy before you purchase one. In addition, you should also consider how a life insurance policy can be used in conjunction with other financial assets to maximize your family’s benefits.

If you own a life insurance policy that is not owned by your employer, you are responsible for the taxes on the proceeds. The only exception is if the employer purchased the policy in a transfer-for-value transaction or if the insured is related to the owner of the policy. This is a form of gifting and should be done with care, as it can have significant tax consequences.

The amount of money you can withdraw from your life insurance policy is limited by the total of your basis in the contract, which includes premiums paid and accumulated cash value. This is because distributions from a life insurance policy are treated as part-gift and part-sale. However, you may be able to avoid paying taxes on withdrawals by reducing your basis in the contract.

Another way to avoid paying taxes on life insurance is to change the beneficiary to someone other than yourself. This will remove incidents of ownership from the policy, which will prevent it from being included in your estate when you die.

Another way to avoid paying taxes on your life insurance is to transfer the policy to an ILIT. This is an irrevocable trust that will hold the proceeds of your life insurance, and it can help you avoid taxes. However, you should consult with a financial professional to learn more about this option.

Riders

A rider is an add-on to a life insurance policy that provides additional coverage under certain conditions. There are a number of different riders available, some of which are standard and can be found in most policies, while others are more specialized. These riders provide the opportunity to create a more robust protection plan for your loved ones, but they may come at an additional cost. A financial professional can help you evaluate your circumstances and determine if they are worth the investment.

One of the most popular riders is the return of premium rider, which offers a partial return of your premiums if you can no longer afford to pay for your policy. This is a great option for people who want to ensure that their family will not suffer from the loss of their income. Another type of rider is a critical illness rider, which allows you to access some of your death benefit while you are still alive, which can be used for things like funeral costs and medical expenses.

Life insurance riders are an excellent way to provide more comprehensive coverage for your family. They also allow you to obtain more coverage without going through the underwriting process. Some life insurance policies even allow you to accumulate cash value on a tax-deferred basis.

While some riders are free, most cost extra and can be difficult to qualify for. For instance, a paid-up additions rider functions like a mini whole life policy and can earn dividends of its own. A PUA rider is often a good option for older individuals who have health issues, as it can offer them more coverage at an affordable price.

Cash value

A cash value life insurance policy gives you funds separate from the death benefit that you can use while alive. These funds can grow tax-deferred and can help you achieve your financial goals. However, it may take years for them to accumulate into a significant amount. The exact amount depends on the type of life insurance policy you choose. Some policies offer a guaranteed rate of growth while others are more risky and fluctuate with market performance.

When you make premium payments, one portion goes toward the death benefit and another toward the insurer’s costs and profits. The remainder contributes to the policy’s cash value account, which grows based on the type of policy. Whole life policies, for example, have a guaranteed cash value at a set interest rate. However, the amount of money allotted to cash decreases as you age, while the cost of the policy increases.

Other types of life insurance policies have a variable cash value account that allows you to invest your funds in different investments, such as stocks and bonds. This can provide a higher level of investment growth and flexibility. However, this can also increase your risks and reduce the return on your investment.

The accumulated cash value in your life insurance account is a useful asset that you can draw on or use as collateral for a loan. However, you should understand that any outstanding loans will detract from your death benefit and accrue interest. You can also choose to surrender your life insurance policy. When you do, the insurer will deduct any outstanding loans and unpaid premiums from your remaining cash value account.

If you do decide to surrender your life insurance policy, it will usually pay you the remaining cash value minus any fees and charges the insurer applies. These can include front-end and back-end charges, which are a percentage of the premium paid in the first few years of the policy and decline over time.