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By Gloria Martinez
Special to the Financial Independence Hub
For some, life insurance may feel like an unnecessary expense. It can range from a few to many hundreds of dollars each month — it’s something you hope you don’t need, and when you’re faced with other expenses, it’s natural to want to trim it from your budget.
However, life insurance can provide a host of financial benefits besides the death benefit, which is certainly an important element of any life insurance policy.
In fact, a 2017 Insurance Barometer Study by the nonprofit organization LIMRA and Life Happens found that 85 per cent of people carry life insurance to cover burial and funeral expenses. Those expenses can range between $7,000 and $10,000, and few people are prepared to incur such a large expense unexpectedly.
Don’t discount importance of the Death Benefit
Even if you’re close to retirement or retired, keeping life insurance is a valuable asset. If you’re still paying off a mortgage that you’ve refinanced or you purchased your home later in life, consider purchasing a life insurance policy to cover the remaining mortgage should you pass away. A life insurance policy will also cover you or your spouse against lost pensions. If you have a large estate on which you’ll incur estate taxes after your death, you can purchase a life insurance policy that will cover the cost of those taxes.
What’s more, you’ll also protect yourself and your family with a good insurance plan that covers your children’s college expenses and pays off other debts besides the mortgage, such as medical expenses, other loans, or credit cards.
You can benefit from Life Insurance while still living
You can use your life insurance as more than just a death benefit, depending on the type you carry. Term life insurance is less expensive and pays out the benefit should the policyholder die. Permanent life insurance, however, includes an investment component that builds cash value over time and you can tap into that cash value should you need it.
For example, if you need to cover the cost of nursing home care — even if you don’t have long-term care insurance — you may be able to access the cash in your current policy. Here are several options to consider:
- Surrender: You can cancel (i.e. surrender) your policy, which returns all accumulated cash value to the policyholder.
- Loans: You can borrow against the accumulated cash value, but check your individual policy, as rules do vary somewhat by company.
- Withdrawals: You can withdraw money from the cash value — and you don’t have to worry about interest charges. Read the fine print, though, as withdrawals sometimes change policy premiums and/or affect the death benefits.
You can also apply for living benefits, which typically allow up to 50 per cent of the death benefit to be paid in advance should you meet the required criteria. These accelerated benefits include chronic or terminal illness benefits and long-term care benefits. Some policies offer these items as standard; you can add the benefits as a rider on other policies. A third option is to sell your policy. This life settlement allows you to access a lump sum or annuity. Investors purchase the policies for less than the policy’s full value but more than its cash value.
Permanent vs. Term Insurance
Permanent life insurance policies — such as whole and universal life insurance — have higher rates than term policies, which can be a drawback for some people, and that’s why many choose term insurance instead. But if you can afford it, permanent coverage can guarantee that your loved ones will be protected financially.
Term policies provide coverage for a fixed amount of time, like 20 years, and they don’t have a cash component. If, however, you outlive the policy, you won’t receive any benefits. If you do have more significant financial obligations, the cash value afforded by permanent life insurance policies might make more sense. Check out this article for more comparisons between the two.
Whichever policy you choose, experts agree that having some type of coverage — even if it’s a lower benefit with a lower monthly fee — is better than nothing at all.
Gloria Martinez started WomenLed to celebrate the advancements women have made and inspire women to become entrepreneurs and seek promotions in the workplace.
