Top 5 Overlooked Advantages of Life Insurance

advantages of life insuranceAs we all know, there are numerous types of insurance options available to us, including the common ones: auto, health and homeowners. Life insurance is also on the list of common types of insurance coverage, yet it is the one that most people assume they can go without.

Technically, this assumption is correct. Americans can choose not to purchase life insurance coverage with the belief that going without coverage won’t have an impact on their lives. But without some form of financial protection in place before death, family members will be completely devastated financially by the lack of coverage.

In other words, the advantages of life insurance are enormous, which is why it’s important to examine them closely before making the final decision that it’s not needed.

Americans Underestimate the Advantages of Life Insurance

Since life insurance is a type of coverage that many people don’t inherently feel the benefits of, it’s easy to underestimate the advantages of life insurance.

In fact, a study conducted earlier this year by Guardian Life Insurance determined that a large number of individuals, particularly employees of companies that offer coverage, may not fully appreciate their life insurance, largely because they don’t understand what it is and how it benefits them.

So what is life insurance coverage and how does life insurance work?

Life insurance is a financial tool used to provide beneficiaries with a death benefit that can cover a policyholder’s after-death expenses. How it works depends on the type of coverage purchased.

Policyholders can purchase either a term life insurance policy or permanent life insurance policy. A term policy is relatively straightforward. It allows a person to purchase coverage over a specific term (period of time). During this period, that person is covered for a predetermined amount in the event of death, as long as he or she pays the coverage premiums. Once this period ends, the person has to renew the policy for another set term to resume coverage.

A permanent life insurance policy is a bit more complicated. Permanent serves as an umbrella term to describe three types of coverage: universal, whole and variable. All three coverage options are deemed permanent because they last over the course of a policyholder’s life, as long as premiums are paid.

But there is more to a permanent life insurance policy than simply paying a death benefit when the policyholder dies. Here are some basics of each type of permanent policy to consider:

  • Whole life insurance: Coverage that guarantees set annual premiums, the cash value of the policy and death benefits.
  • Universal life insurance: Universal is a more flexible coverage. It allows premiums to vary from year to year, as opposed to set premiums with whole life insurance. Also, it offers a savings account option that allows the policyholder to invest.
  • Variable: Variable life policies offer the fewest premium and benefit guarantees; however they provide more potential for cash-value because investments are riskier. Unlike whole and universal policies, policyholders get to choose investments.

As you can see, depending on the type of policy offered, life insurance can meet a number of goals. So why aren’t people buying it?

In addition to not understanding coverage, according to LIMRA, the top two reasons people don’t purchase life insurance are competing financial priorities and because they think they can’t afford it.

Study after study shows that life insurance is not as expensive as many people think. In fact, coverage can cost as little as $12.50 per month for a $250,000 term policy, which shows the pros outweigh the cons.

Benefits of Life Insurance Often Overlooked

After reviewing how life insurance works, it’s easy to wonder why so many people overlook its advantages. Typically, not only are they unaware of its basics, but they don’t know the additional benefits of life insurance coverage that are accessible to them by activating a policy:

1. Life Insurance Is a Tax-Free Asset

Many people don’t know that life insurance offers tax-free benefits for both the policyholder and beneficiaries. As tax rates continue to increase, having life insurance can help ensure the family doesn’t owe the IRS at payout. And if the policyholder chooses a cash value payout for retirement or other expenses, he or she can benefit from tax-friendly savings.

2. Health Insurance Costs Covered

A recent report from Commonwealth Fund revealed that health insurance premiums have jumped 62 percent over the past eight years, largely due to an increase in health expenses. As consumers age, the cost of care associated with hospitalization or nursing care will likely increase as well. The cash value aspect of permanent life insurance allows policyholders to draw money to cover these costs, or other unexpected emergencies.

3. Strong Life Insurance Regulations

Some don’t realize that the life insurance sector is highly regulated thanks to the Insurance Regulatory and Development Authority (IRDA). This regulatory body creates rules and regulations that ensure the safety of policyholders’ money. So while permanent insurance policies come with a bit of risk in terms of investment, insurance companies aren’t allowed to take risks that could compromise a policyholder’s or beneficiary’s payout.

4. Life Insurance Serves as Income Replacement

If you are the primary breadwinner or supply considerable income to the family, there is no doubt that your income will be missed. Many people fail to realize that this loss of income at death can be easily replaced by purchasing the right life insurance policy. A simple term policy can replace income for years to come, ensuring spouses and other family are not left to determine how to pay the deceased’s bills.

5. Loan Options Are Available

Many people are accustomed to taking out loans against their 401(k) without realizing that they can also do so with a permanent life insurance policy. The primary difference between borrowing from life insurance policies versus a 401(k) is that the latter comes with a boatload of penalties that jeopardize a person’s retirement savings. On the other hand, borrowing from a life insurance policy does not affect the policy benefits, as long as interest is paid.

When deciding whether to purchase a policy, keep in mind that some say life insurance policies are expected to increase in 2013 thanks to new premium prices scheduled for next year and new actuarial guidelines passed by the National Association of Insurance Commissioners (NAIC) that are expected to raise insurer reserve requirements.

In other words, not only is life insurance an important asset to you and your family, but if you want a policy, it’s a good idea to purchase it sooner than later.