Many people think of life insurance as a product for family protection. The life of one or two breadwinners is insured; in case of an untimely death, the insurance payout can help with raising children and maintaining the current lifestyle.
Once the children are able to live independently and a surviving spouse is financially secure, insurance coverage may be dropped. Such a strategy uses life insurance as a hedge against the risk of lost income when that cash flow is vital.
This type of planning is often necessary. That said, life insurance may serve other purposes, including some that are not readily apparent.
When someone dies, funeral and burial expenses can be daunting. In addition, the decedent’s debts might need to be paid off, perhaps including substantial end-of-life medical bills. Many insurers offer policies specifically for these and other postdeath obligations, with death benefits commonly ranging from $10,000 to $50,000.
The beneficiary, typically a surviving spouse or child, can receive a cash inflow in a relatively short time. Generally, this payout won’t be subject to income tax. The result might be less stress for beneficiaries during a difficult time and a reduced need to make immediate financial decisions in order to raise funds.
Life insurance also can help to treat heirs equally, if that is someone’s intention, but circumstances create challenges.
For example, a business owner may want to leave the entirety of a business to one child upon the owners death, perhaps because that child has been involved in running the business. But at the same time, the owner wants to make sure that a second child that has never shown interest in the business is taken care of. By taking out a life insurance policy payable to the second child, the business owner can be sure that all of his or her children are taken care of after the owner’s death.
Our office can help explain the tax aspects of a policy you’re considering, but you should exercise caution when evaluating any possible purchase of life insurance. Find out what you’ll be paying and what you’ll be receiving in return.