Life can veer from even the best-laid plans. Whether it’s a sudden home repair or costly illness, an “unplanned” event can come with a hefty price tag attached.
Nearly one in five life insurance policyholders do not feel sufficiently insured.
Life insurance is one way individuals can build up more financial security to protect family, loved ones, and a business before and after their death.
Despite its potential value, only 50% of Americans reported having life insurance, according to the 2022 Insurance Barometer Study. And the gap between those who need life insurance and those who have it has more than doubled over the past 12 years.
Whether you’re already covered by life insurance or are considering taking out a policy, let’s take a look at why life insurance is important and how you might use it to help make progress on long-term financial goals.
Reasons Why Life Insurance Is Important
Here are eight reasons why life insurance could be the right decision for you and your loved one’s financial future:
1. Paying Off Debts
Millions of Americans accumulate some level of debt throughout their life. Taking out a mortgage and student loans are some common forms of debt that can be part of a sound financial plan. Other types of revolving debt, such as credit card debt, can be riskier due to high interest rates and potential harm to credit scores when balances don’t get paid off.
When someone dies before paying off their outstanding debts, the money they owed could financially burden their estate, family, and heirs.
While not every outstanding debt is the responsibility of heirs, cosigners or joint account holders of the deceased could be liable for paying the remaining balance. It’s important to note that every state has distinct laws that govern how unpaid debts get prioritized after a person’s death.
There are some cases where young people without dependents may also be interested in life insurance. For instance, when a parent or guardian is a cosigner on a student loan, taking out a life insurance policy on the adult child could cover the remaining educational debt in the event of the parents’ untimely deaths.
Generally, the life insurance premium paid by younger policyholders can be lower than those paid by middle-aged or older individuals.
Life insurance may provide a financial safety net for loved ones left holding the bag on paying off debts. For some, it could prevent certain scenarios, such as needing to sell the family home to balance the debt books in the wake of a death.
2. Giving Loved Ones a Financial Future
Sparing family and dependents the burden of debts could prevent financial hardship if the worst were to happen. However, preparing for future expenses can be important too, especially for people with children and dependents.
Life insurance can help fill the income gap and supplement added expenses when one parent or the primary family breadwinner passes away. A death benefit could be used to cover day-to-day purchases and living expenses, such as groceries, utilities, and car payments. It could also help fund larger expenses, such as paying for a child’s college education.
Other dependents, such as aging relatives or children with special needs, may need long-term care that can be covered by life insurance benefits, when an eligible policyholder passes away.
3. Leaving an Inheritance
There’s a lot of work that goes into making and saving money. So it’s understandable to want to pass on as much of one’s hard-earned cash and assets as possible to loved ones or a charitable cause. Compared to stock market investments, life insurance can be less susceptible to value fluctuation.
Life insurance is one way to create an inheritance that is typically not taxed before reaching heirs or beneficiaries. (There are exceptions here, including when interest is received and when the beneficiary is a certain type of estate. Check the IRS for more details.)
Policyholders can name multiple beneficiaries and lay out how the inheritance should be allocated between them. For example, the death benefits could be split evenly among surviving children or a portion could be directed to a charity or nonprofit organization.
Additionally, contingent beneficiaries can be named to receive the death benefits if a primary beneficiary passes away or is unable to claim them.
4. Providing Extra Support Through Retirement
Many people only associate life insurance with death, but the right policy can also fit into the mix for retirement planning. Permanent and whole life insurance last the policyholder’s lifetime and often incorporate a “savings” component, known as cash value.
With such policies, the cash value can be withdrawn or taken as a loan to supplement income during retirement or be put towards long-term care services.
Nearly 70% of people living past the age of 65 can expect to need some form of long-term care, according to the U.S. Department of Health and Human Services. Securing funding through life insurance for medical and non-medical care in the event of an illness or disability could make a difference in quality of life.
5. Protecting a Business
If a business owner or partner in a joint venture passes away, their employees and business partners could be left out to dry.
Fortunately, life insurance can infuse some financial certainty and be an asset to a business. For one, life insurance benefits could give a cash boost to keep a business afloat while things get settled.
Creating a buy/sell agreement between business partners is another possible option. In this scenario, a life insurance policy is taken out on each partner, usually to equal that person’s share in the company.
If an insured partner dies, the surviving partner(s) will have the cash necessary to buy out the heirs’ share of the business, if they so choose. This may enhance the financial security of all parties involved, including their families.
A business owner may also use certain types of life insurance policies to borrow money against. Keep in mind that only whole or permanent life insurance policies are eligible for cash value accrual.
These types of policies generally carry higher premiums. But, because policyholders pay a greater amount than the death benefit, the policy can accumulate cash value. (Some policies may guarantee a specific cash growth amount, while others tie the cash value to current interest rates or invest in subaccounts).
There is no approval process or credit check for such a loan, since the policyholder is borrowing from funds they’ve already paid into the policy. However, some insurance policies in this category can come with “cash out” fees or charge interest on the amount borrowed from the policy.
6. Handling End-of-Life Expenses
When someone dies, their family and friends may have to take on settling their affairs and planning a funeral while grieving a loss.
Including end-of-life expenses in a life insurance policy could spare loved ones money and additional stress. Costs vary between funeral homes and geographic areas, but it’s not uncommon in the U.S. to pay between $7,000 to $12,000 for a funeral service, burial, and headstone.
Informing chosen beneficiaries that they’re designated on a policy can help the life insurance claims process run more smoothly. They’ll need a certified copy of the death certificate to then submit the requisite paperwork.
7. Preparing For the Unexpected
Conventional wisdom says to have a rainy day or emergency fund so you’re prepared for unexpected events like losing a job or a car breaking down.
While various types of insurance can protect and compensate for damage to your valuables and home, there is no price that can be put on someone’s life. Still, death is one of life’s certainties. And, life insurance is one tool for having a financial plan in place when death comes.
Among other considerations, an applicant’s health and age can factor into the price of life insurance premiums. Thus, waiting until a serious illness arises may decrease your chances of securing a favorable life insurance plan, or one at all.
8. Offering Confidence
While planning in advance for one’s own death may feel a little morbid, making a plan for what would happen after a sudden death can give some individuals peace of mind that their loved ones will be taken care of.
Life insurance could ease financial hardships for families after a policyholder’s death.
According to a Federal Reserve survey, 32% of Americans would not be able to pay for an unexpected $400 expense between cash, savings, or a credit card by the next statement.
The loss of a primary earner or caregiver could destabilize many families with the combination of added costs and less money coming in. Even a modest life insurance policy could fill part of the income gap during such difficult times. An online term life insurance calculator can help you estimate how much life insurance coverage you might need based on your financial goals and situation.
The Takeaway
Understanding why life insurance is important to your financial plan can be helpful when you’re researching and selecting a policy that best fits your needs. A life insurance policy can act as a safety net for the policyholder’s loved ones, helping them pay off outstanding debts, fund larger expenses like college education, provide additional support during retirement, or even protect a business.
If you’re shopping for life insurance, SoFi has partnered with Ladder to offer competitive life insurance policies that are quick to set up and easy to understand. You can apply in just minutes and get an instant decision. As your circumstances change, you can easily change or cancel your policy with no fees and no hassles.
Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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