Everyone knows life insurance pays out to your loved ones when you die, so they can keep on living. But did you know there are other reasons, too, for buying life insurance? Here are a few of them.
1. Life Insurance as Mortgage Backup
If you have a mortgage, you won't want your family or significant other to suddenly be left with a mortgage they can't handle. One way to set things up nicely for this is to choose term life insurance. That means they'll be covered for as long as they have the mortgage, if you match the term to the remaining time left on your mortgage.
2. Life Insurance for Short-Term Needs During Probate
There are a few different ways to view life insurance. One way is that it can become income replacement for your survivors. Another viewpoint is that it's a means for dealing with the short-term fallout that occurs when the breadwinner is suddenly out of the picture forever.
Those expenses may include medical and funeral funeral expenses, but can also include the day-to-day expenses while your estate is in probate. Your family may not have access to your estate until it's passed through probate, which can take anywhere from a week to years. A life insurance policy can simply be a means of providing for your family during that time.
3. Life Insurance for a College Education
If you have kids or grand kids, you'd probably like to see them go to college. You can help make that possible during your lifetime by earning money and putting some of it into a college savings plan.
However, if you die unexpectedly, those contributions will stop. One way to make sure there's still money for college is to invest in a life insurance policy that will cover the cost of a college education.
4. Life Insurance for Your Liabilities
If your estate will owe money, life insurance can be one way to make sure your heirs aren't saddled with the burden of paying off your loans or paying your tax bill.
If your estate is non-liquid, and it all needs to be sold off quickly to pay the bills, your heirs may take a loss on the real value of your property. Life insurance can relieve the pressure of having to sell everything quickly just to get cash for living.
5. Life Insurance to Protect Beneficiaries from Your Creditors
Let's say you know you'll owe money when you die, and lots of it. Your creditors have rights to your estate, which means your heirs may not see any of it until your debts are paid off.
The cash value of a life insurance policy, however, is protected from creditors, in many states. Check to see if that's the case in your state, and make sure you take out a policy that's personally owned. A financial advisor can help you with all the details.
A Final Word
Finally, keep in mind that life insurance only pays out if you die. It's not a disability program, and it's not going to help you if you get sick. Also, life insurance policies all differ. Many have exclusions so pay careful attention to the fine print and make sure you're not buying a policy that won't pay out if you die because of a pre-existing illness, for example.
A financial advisor can help you sort out all the details of buying life insurance in your state, and can explain all the different types of policies as well, so you can find the one that works for you- even if you'd never heard of all these good reasons for life insurance before today!
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Scott Frank is the founder of Stone Steps Financial, a fee-only financial planning firm located in Encinitas, California. Scott started Stone Steps to help young professionals and families understand their financial lives and position themselves to reach their fullest potential. Scott and I became friends after meeting at a NAPFA West Region conference, and I asked him to write some thoughts on life insurance as a guest topic for this site. |
Scott Frank | Stone Steps Financial