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Life insurance is something most people don't think about until they have dependents who rely on their income, but it can be a valuable tool for anyone who wants to leave their loved ones with more financial security after they pass.
Having life insurance can provide peace of mind and serve as a financial lifeboat for your family in a variety of ways, from covering your final expenses to paying off your debts. Here are six things life insurance can be used for.
1. End-of-Life Costs
Funerals can get expensive. In 2023, the median cost for a traditional funeral with a casket and burial was $8,300 (and $6,280 for cremation), according to the National Funeral Directors Association. One of the most common uses for life insurance is to help cover funeral or cremation costs; dying without a policy or adequate savings to cover these bills can leave your family in a financial lurch while they're also grieving.
Life insurance benefits can be used for a variety of other final costs, such as probate and estate settlement, medical bills that health insurance didn't cover and any other related unpaid debts or bills.
2. Financial Support for Your Dependents
If something were to happen to you unexpectedly and your family lost your income, would they be able to get by? The financial impact of your death could be devastating if you currently financially support (or plan to support) a spouse, children, aging parents or other relatives. If you are the sole or primary earner, and if you don't have much savings, it's even more important to plan ahead.
If you die with a policy in place, the predetermined death benefit goes directly to your named beneficiary or beneficiaries right away, and it's usually exempt from federal income taxes.
Your loved ones can use the death benefit for whatever costs needed, such as:
- Everyday bills
- Child care or tuition
- Pay the mortgage (or even pay it off)
- Continuing to operate a family business
- Saving for weddings or college for family members
3. Pay Off Your Debts
If you have joint or cosigned debts with your spouse, or if you live in a community property state, your spouse may be on the hook for certain debts if you die.
Life insurance proceeds can go toward paying off debts that didn't go away with your passing, from car loans to credit card bills, leaving your family with fewer financial burdens and more security.
4. Inheritance
If you want to leave an inheritance for your children or other relatives, the cost of monthly life insurance premiums could feel more manageable than socking away money in savings or investments. Plus, if you get a whole life policy, it's guaranteed to grow tax-deferred and can help your family with future financial goals.
When you name those loved ones as beneficiaries on your life insurance policy, they will receive the funds when you die. Since life insurance's death benefit is paid quickly and usually without federal taxes, it can be a simple way to ensure your family receives an inheritance—especially if you won't have other assets to pass on.
5. Charitable Contributions
Are you hoping to leave money for a charitable organization as part of your legacy? If you don't have a large lump sum of money that can be given away upon your passing, you can set up a life insurance policy with a charity as your policy's beneficiary.
Your monthly life insurance premiums space out the cost, and when you die, the organization will receive your death benefit as a donation.
6. Estate Taxes
If you leave behind a sizable estate, your family may be subject to death taxes or estate taxes at the federal and/or state level. In 2024, your family won't owe estate tax unless your estate is valued over $13.6 million.
If your estate does exceed that amount, your family can use your life insurance proceeds to cover some or all of their tax bill. This lets them avoid having to liquidate other assets or using a portion of their inheritance to cover the hefty tax bill.
Frequently Asked Questions
Life insurance isn't a must-have for everyone, though many adults can benefit from it. Even if you don't have a spouse or kids, a life insurance policy can ensure there's money to pay for all of your final expenses so your family doesn't have to foot the bill.
However, if you have adequate savings that could cover these expenses, you may not need life insurance for this purpose. The decision comes down to whether your family would need this financial safety net if you die unexpectedly, and what types of obligations and debts you'd leave behind.
Think about if something were to happen to you, and who in your life will be impacted financially—both for short-term, everyday expenses like bills, plus long-term goals like your children's future weddings and college.
If you're young, unmarried and without significant debts, you may not need life insurance. But if you have many debts your parents would be responsible for, or you don't want them to pay for a funeral, a policy could be beneficial. If you're married, the decision may hinge on your spouse's situation. A spouse who's a homemaker would likely need more support should you die than a spouse who's a high income earner.
Learn more >> What Should You Consider Before You Buy Life Insurance?
Some life insurance policies allow you to access money from your own policy before you die. This isn't the case with term life policies, however, which have no cash value and end if the term concludes with the insured person still alive.
On the other hand, permanent life insurance policies, such as whole life and universal life, are yours until you die. They provide a guaranteed benefit and are considered an asset with cash value that you can borrow from, withdraw from, and in some cases, invest. You could put this toward medical expenses or, in some cases, toward paying your premium. Just know that taking money from your policy and not repaying it will reduce the death benefit your loved ones receive.
Some insurers allow customers to add riders with an accelerated death benefit. This is an extra cost, but if you become terminally ill, it may let you tap your policy prematurely to help cover for immediate medical expenses.
Life insurance policies can be used in a variety of ways and for different purposes. One is to help build wealth for your family. If you get a permanent life policy, it's an asset with cash value that you own, and it will grow tax-deferred. For estate planning purposes, this can make it easier to transfer assets to your loved one—especially since life insurance payments aren't usually subject to federal taxes.
Your family can use your death benefit money to help build generational wealth, such as by paying for education, buying real estate or starting a business. You can also borrow from your policy while you're alive to generate wealth; this could be by making investments in real estate or the stock market, starting or growing a business, eliminating debt or obtaining higher education. Don't forget, though, that any money you take out will reduce what your family receives upon your passing.
The Bottom Line
Life insurance is often underestimated and misunderstood. It can be used as a way to cover your funeral costs, but life insurance can also be used for numerous other purposes—from paying off your debts to building family wealth to even serving as retirement income.
The tricky part is that life insurance comes in many forms, with varying costs, benefits and downsides. Take time to research how much life insurance you need and which type of policy is best for your goals and purpose for it so you can maximize what you spend on the premiums.