Although most people don’t like to think about it, there may come a day when loved ones will need the protection that a life insurance policy can provide. Life insurance proceeds can be used for a number of different reasons – and by having the peace of mind that this coverage can offer, survivors will be able to move forward without the need to endure financial hardship.
Final Expenses
It is likely that there will be some final expenses due upon death. One such item is the cost of a funeral. Today, the average price of funeral and burial arrangements can be in excess of $10,000 – and in many cases, the amount may be due immediately. As many people do not have that amount of liquid cash readily available, the proceeds from a life insurance plan could provide the solution. In addition, if the decedent incurred a lengthy hospital stay or other types of medical expenses, the life insurance death benefit may also be a way to pay off these costs quickly and without the worry of a long-term payment plan with interest charges.
Estate Taxes
Although many may feel that estate taxes are only due from the rich, the truth is that it is not uncommon to incur a tax from Uncle Sam upon death. In many instances, estate taxes are due within six month of an individual’s death, so having cash available from a life insurance policy can help in these matters as well.
Unpaid Debts
The funds from a life insurance policy can also be used to help survivors in either reducing or paying off debts such as a mortgage, credit card balances, and other obligations. In light of the fact that the decedent’s income will no longer be available to make payments on these bills, life insurance proceeds may be the only way to eliminate these expenses without incurring a substantial financial difficulty. In fact, without these funds, it may be necessary for the survivors to sell their home or other assets in order to survive financially.
Future Expenditures
Life insurance proceeds can also be used to make good on future expenditures or promises. For example, should the decedent have children, these funds could go towards funding a college savings account, the cost of a child’s wedding, and other items or events that were promised for the future.
Donations to Charity
Many people wish to donate to a favorite charity both during life as well as after death. The funds from a life insurance policy could be used to do this – and in doing so, the decedent’s estate may even receive favorable tax benefits by allocating money to the charity or other tax exempt organizations.
The Bottom Line
Because life changes on a regular basis, the need and the amount for a life insurance policy may also change. Therefore, once a plan is purchased, it is a good idea to regularly review it – at least on an annual basis – in order to ensure that the coverage is still adequate to cover the intended needs. Should a major life event such as marriage, divorce, or the birth of a child occur, it is also important to review coverage needs at those times as well, because the new situation could have a major impact on how much insurance an individual may require.
{ 7 comments… read them below or add one }
Things to keep in mind when choosing a policy are funeral costs, outstanding debts, and making sure enough is left over for the kids and spouse. It’s a painful expense but it would be much harder to make $10,000 magically appear for a funeral.
My wife and I thought about this thoroughly before we bought our life insurance policy. Our thought was make sure that everything can be paid off incase that happens (house, car, funeral expenses etc)
Currently, we’ve each got enough life insurance to pay off both of our houses… and the remaining spouse could live comfortably off of one income. Once we have children we’ll bump up our life insurance to ensure it covers all childcare costs and perhaps some post-secondary education.
I don’t see the need for having millions and millions in life insurance. Yes, I would be distraught if my spouse passed away, and I’d certainly take time off of work… but I don’t think I’d instantly retire and never work another day in my life.
Few exceptions are — 1) if you are unmarried, and have no dependents 0r 2) if you are senior with no debt and good assets. Otherwise, everyone should consider term life insurance to protect their families from income loss due to death.
Since my wife makes enough money to support herself without me and we have enough savings to cover burial expenses I don’t feel we need life insurance. If we start making more money I would consider purchasing some life insurance since it would then be more difficult to replace the income.
We also look at our needs every few years and most every time we think “we should have done this sooner…” Its so important to stay up to date… thanks for reminding me
We reevaluated our life insurance needs about a year and a half ago, when I started working freelance from home – some days, I HATE that I pay the premiums at all (it feels less necessary than my car or home insurance), but other days, I see the immense values in those policies, even if (pray God) I never need them.