Life insurance can be an important part of any overall financial plan, but it’s often misunderstood, underutilized and seen as more of a burden than anything else. However, life insurance has several benefits that make it worth the cost, even if you only have one policy in place to provide coverage for your entire family. If you want to find out how to use life insurance to build generational wealth and make sure your family members are secure no matter what happens, here are 10 benefits of life insurance every family should know about.
1) Accumulating assets
When it comes to family wealth, everyone knows that you should avoid debt and use as many tax-advantaged investment vehicles as possible. But what about hard assets? If a breadwinner were to pass away unexpectedly, how much would his or her family be able to access in terms of liquid cash? While most people realize life insurance is important in the event of death, many overlook its crucial role in helping those who depend on a breadwinner to accumulate wealth.
2) Passively increase income
While it takes hard work to build a passive income stream, it is possible. Again, it is not easy and it takes a lot of work but if you want to retire early with a massive bank balance, passive income should be one of your financial goals. In our 9-part Passive Income series , we dig deep into how passive income works and show you exactly how we make over $1 million a year in passive income. It’s not as impossible as you think!
3) Free up cash flow to invest in more assets
When you take out a life insurance policy, you are essentially paying premiums in exchange for a promise that your beneficiaries will receive certain benefits. In most cases, those benefits consist of money—and that cash can be used to pay off debt or purchase other types of assets. For example, if you have a life insurance policy on which your beneficiaries receive $150,000 in death benefits and $15,000 per year in living expenses, they can use that money as they see fit.
4) Pass on your legacy
It’s not an exact science, but if you’re concerned about leaving behind a sum of money that your loved ones can rely on, then consider purchasing life insurance. This type of policy will help protect your family from financial hardships after you pass away by ensuring there’s money available to pay off outstanding debts or continue income streams while they get back on their feet. A term life insurance policy is also a tax-free way to transfer wealth to future generations.
5) Accumulate wealth from all sources
Financial advisors often talk about allocating your investments according to risk tolerance, but life insurance offers a way to turn one of your greatest financial risks into an asset. The value of your family’s wealth shouldn’t be entirely dependent on market volatility, and you can use a life insurance policy to diversify it in ways that make sense both financially and emotionally.
6) Protect your family
It’s hard to imagine a world without your family members in it. If you die, though, they could find themselves in a vulnerable financial situation. That’s why it’s important to have life insurance so that your family will be secure if something happens to you. It can also be used as an investment vehicle by allowing your loved ones to borrow against its value while you’re alive.
7) Provide critical protection in the event of an untimely death
The most important benefit, by far, is that life insurance pays out to your beneficiaries when you die. Without life insurance, your family would have to tap into your remaining assets (e.g., house) in order to pay off final expenses like medical bills or funeral costs. They might even have to sell assets and investments just to keep up with their regular monthly expenses—all while grieving.
8) Minimize taxes
The younger you are when you buy life insurance, and the lower your income, generally speaking, the less you will pay. To maximize your tax benefits—or avoid taxes altogether—life insurance can be purchased as part of a larger estate plan.
9) Avoid estate fees upon death
When you die, your property must go through probate in order to be distributed. Probate can take months, and often involves attorneys’ fees and court costs. With a life insurance policy, your family can avoid these extra costs, which would otherwise eat into their inheritance. The cost of life insurance is often negligible when compared to what you stand to lose from probate fees and court costs. In many cases, it’s cheaper to pay an annual premium than face these expenses upon death.
10) Be ready if tragedy strikes
There’s no guarantee that your family will survive you, but there are ways to take precautions that can increase its odds. If you have children or other dependents, consider purchasing life insurance—it may seem unpleasant to do so, but having it in place could mean financial security for your loved ones if tragedy strikes. You can also buy survivor insurance on top of life insurance, which ensures that if one spouse dies, the other will be able to maintain a certain standard of living.