Importance of Life Insurance for Financial Planning

Often, it’s difficult to fathom long-term financial outcomes, especially in the event of your death. The harsh reality is death is inevitable, so that’s why it’s crucial to include life insurance as a part of your financial plan.

If something happens to you, what will happen to your spouse, children, or any other family member who relies on your income? So, that’s why it’s crucial to have life insurance to mitigate and provide adequate financial support especially when your absence puts your loved ones in a dire situation, especially from a financial aspect.

Apart from that, by including life insurance in your financial plan you can leverage benefits such as estate planning, wealth transfer, retirement planning, getting tax benefits, paying off debts, and more.

When it comes to effective financial planning, life insurance is the ultimate investment and financial backup for you, and your loved ones. It can either be a long-term financial resource that you can use in the future or your loved ones can redeem it to cover various essential expenditures.

What is Life Insurance?

Life insurance is a binding contract between you and your insurer, where you regularly pay money to an insurance company, and in return, the insurer will pay a lump sum of money to your beneficiaries after you pass away.

In other words, it is also called death benefit as life insurance particularly applies after the death of the policyholder. It can also be used to pay off debt or any outstanding loan after your passing.

How Does Life Insurance Work?

The way life insurance works is quite simple and straightforward, you periodically pay an agreed amount of money to your insurer, it can be on a monthly or annual basis. You need to declare beneficiaries to your insurer who will receive the coverage after your death.

You can list one person as a beneficiary or even multiple people. Plus, you can allocate how much coverage each person will receive from your life insurance coverage. Your beneficiary can claim your life insurance coverage after your passing but for that, they need to provide your death certificate.

Once the life insurance claim is filed, your insurer will investigate and verify whether your death happened based on the agreed terms and conditions. Based on the investigation if everything checks out legitimate, then it can take 14 to 60 days to complete the official and regulatory processes to pay out your life insurance coverage to your beneficiary.

When it comes to redeeming the coverage, it is up to the beneficiary to decide whether they want the payout in total as a lump sum or in periodic installments on a monthly, quarterly, or annual basis.

Why is Insurance an Important Part of a Financial Plan?

Insurance is a vital part of financial plans, especially to ensure that your debts are paid off even after your passing, and most importantly to provide adequate financial protection for your loved ones after your death.

According to recent surveys, it was found that 42% of Americans don’t have any emergency funds. In fact, 64% of credit card holders in the U.S. carry a month-to-month credit debt.

While most American households don’t have any emergency funds, they can have debts piling up leading to bankruptcy without proper financial planning. If you’re a key financial contributor in your family or household, it is crucial for you to consider life insurance as an important part of your financial plan, mainly for the following reasons.

When it comes to making financial plans involving life insurance, it is essential to consider exploring a reliable insurance agency with the best policies within your budget. If you’re located in Flint, Saginaw, Mt Pleasant, or anywhere in Michigan, you should consider checking PLPD’s life insurance solutions.

Financial Protection for Loved Ones

Life insurance is reliable for safeguarding your family’s financial future. The death benefit can be used to pay living expenses, educational costs, mortgages, and even ongoing debts, especially to ensure that your loved ones are not burdened by financial hardships even after your death.

Additionally, life insurance coverages can also be used as long-term financial assets as they typically provide a lump sum coverage or a significant payout on a monthly or annual basis up to the coverage limit. Also, permanent life insurance coverages increase cash value which can provide increased payout when the insurance is claimed.

Income Replacement

If you’re the primary earning member of the family or a key financial contributor then your death can have a severe financial impact on your family. But with life insurance, you can at least mitigate this income void and prevent financial suffering after your death.

So, if you need a financial plan for immediate income replacement, having a life insurance policy is one the smartest ways to ensure that.

Estate Planning and Wealth Transfer

Even for passing on assets, property, and wealth, it is necessary to pay substantial taxes, legal fees, and other expenses. After your death, these expenses can be difficult to pay off, especially for all these financial barriers.

So, that’s why it’s crucial to consider life insurance for estate planning and wealth transfer. With life insurance, you can manage financial support for the listed beneficiaries so that they can afford to pay the expenses required for estate planning and wealth transfer.

Plus, they can even pay off debts on properties such as your home or business to prevent creditors from acquiring it as debt compensation.

Retirement Planning

There are life insurance coverages such as whole life insurance or universal life insurance that have significant increases in cash value over time. This makes life insurance an effective tool for retirement planning.

As the cash value grows, you can access it through policy loans or withdrawals to help cover retirement expenses, supplement your income, or manage unexpected costs, all while maintaining a death benefit for your loved ones.

By incorporating life insurance with your retirement plan, you can secure long-term financial protection for your loved ones. Plus, it also provides you with the flexibility of gathering flexible financial resources during your retirement years.

Debt Protection

Another crucial use of life insurance is it can be used to pay off debts after your untimely death. For instance, if you have debts such as mortgages, personal loans, or even business loans then your beneficiaries can pay it off with the life insurance coverage.

You can even set up debt payment with your insurer so that it’s automatically paid off after your passing either periodically or in a lump sum amount.

If your debts aren’t paid off, then your creditors may take over any asset or business that the loan was taken against, in this way your family may lose property that they were supposed to inherit after your death.

But with life insurance coverage such as decreasing term insurance, you can pay off debts and protect your loved ones from both financial and legal complications.

Tax Advantages

There are several tax advantages of having life insurance. The biggest advantage is permanent life insurance policies with a growing cash value remain tax-deferred as long as your insurance is in force.

You will only owe tax when a withdrawal is made, so that means you will not be taxed for the growing cash value allowing you to accumulate more savings over time.

Interestingly, after your death, when the beneficiary withdraws the accumulated amount, it will be completely tax-free for them. So, they can use the total amount to maintain their standard of living, pay off mortgages or debt, provide education costs for children, and other essential expenses.

Types of Life Insurance

When it comes to life insurance, there are typically two main types of life insurance; term life insurance, and permanent life insurance. These two types of life insurance are broken down into mainly 6 different sub-types which you can choose from depending on your budget and insurance needs.

Term life insurance is a low-cost insurance policy that typically covers your beneficiaries during the time you periodically pay your insurance premiums, usually between 10 and 30 years. Simply put, the term life insurance coverage will pay death benefits if you pass away within the term period.

Let’s say, your agreed term life insurance is 10 years, so if you die within 10 years only then your beneficiaries will get coverage. The biggest disadvantage of this type of coverage is that if you live even after 10 years and your policy expires, you or your beneficiaries get nothing, not even the premiums that you’ve contributed so far, unless you obtain the return of premiums.

Here’s a catch though, with the return of premium, your insurer will return the insurance premiums that you have paid during the term period. You can get a full refund of the premiums that you’ve paid if you outlive the policy term. ROP (Return of Premium) insurance can cost you 2 to 3 times more than the standard term life insurance.

Permanent Life Insurance is a much more secure life insurance coverage in which you periodically pay monthly, quarterly, semi-annually, or annual premiums as long as you live, or continue the policy. Unlike term life insurance, permanent life insurance builds up cash value with a minimum interest rate or one that’s adjusted to the market value.

So, here’s how permanent life insurance works, you pay insurance premiums your whole life, and the total amount accumulates as cash value, either earning interest or investment returns. Once you pass away, your beneficiaries can claim your permanent life insurance policy to get the total lump sum that you paid, along with the profit that you’ve earned over time.

Usually, the insurance coverage is paid to beneficiaries in a lump sum after it gets approved, unless you’ve provided specific payout instructions on a periodic basis, or the beneficiaries ask the insurer to provide it in installments.

Now that you’re familiar with the two main types of life insurance, let's take a closer look at the 7 different sub-types of life insurance. The first four fall under term life insurance, while the remaining three are part of permanent life insurance.

Here are the 4 subtypes of term life insurance as follows.

Level Term Life Insurance

Level-term life insurance is also known as term life insurance. It typically provides death benefits to your beneficiaries if you pass away within the agreed term period which is usually between 10 and 30 years.

However, if you outlive the term period, and the policy expires, you will not get any payout.

Return of Premium Coverage

If you want to get your premiums back after your level term life insurance ends, you’ll need to add Return of Premium (ROP) coverage to your policy. This optional feature refunds 100% of the premiums paid if you outlive the term.

Without ROP coverage, your premiums are not refunded, the policy simply expires with no payout if you’re still alive at the end of the term.

Decreasing Term Life Insurance

The decreasing term life insurance is a death benefit that gradually declines over time, typically in line with a loan or mortgage payment. The payout reduces overtime usually after each month or a year based on the agreed terms between you and your insurer.

This type of policy is commonly used to cover debts, mortgages, or other financial obligations that shrink over time, ensuring your loved ones can pay them off if you pass away during the term.

Renewable/Convertible Term Insurance

If the policy term life insurance policy expires while you’re still alive, you won’t get any payout, or refund with ROC coverage. Even with the refund of premiums, it beats the entire purpose of covering your beneficiaries after your death. So, the alternative here is to have renewable term coverage to ensure that your term policy stays active and does not expire.

Another alternative is you can get convertible term insurance to convert your term life insurance to permanent life insurance coverage.

Here are 3 subtypes of permanent life insurance as follows.

Whole Life Insurance

Whole life insurance is a permanent type of life insurance that requires you to pay a fixed amount of premium over time which is usually on a monthly or annual basis. In return, it guarantees a fixed death benefit coverage for your beneficiaries and includes a cash value component that grows over time at a guaranteed interest rate.

While the whole life insurance coverage provides long-term stability and a reliable financial backup for your beneficiaries, it lacks flexibility. You cannot adjust the premium amount or benefit structure, and the interest rate is fixed as it does not change with market conditions.

Universal Life Insurance

With universal life insurance, you have the flexibility to change your insurance premium or adjust the interest rate based on current market conditions for a smooth increase in cash value, unlike whole life insurance.

Usually, in most cases, the universal life insurance coverage policy also comes with a minimum interest limit, so that keeps your investment on the safe side if the market rate significantly declines.

The biggest advantage is that with universal life insurance coverage, you get all the benefits of whole life insurance with flexibility. So, you can easily adjust your insurance premium based on shifts in income or market conditions that are more favorable for you. However, the added flexibility also means the premiums are generally higher for universal life insurance.

Variable Life Insurance

Variable life insurance is a type of permanent life insurance that combines lifetime coverage with investment options, such as mutual funds, bonds, and other market-based sub-accounts. A portion of your premium goes toward maintaining the life insurance coverage, while the rest is invested to grow the policy’s cash value.

The cash value and potentially the death benefit can increase if your investments perform well but they can also decrease with poor market performance. Most policies include a guaranteed minimum death benefit, offering some protection.

Upon your death, your beneficiaries typically receive the death benefit, which may vary depending on how the investments performed.

Role of Life Insurance Policies in Financial Planning

When it comes to making an effective financial plan for your loved ones, it is crucial to ensure their financial stability. If you intend to make financial plans on a long-term basis, life insurance is the best investment that you can make for your loved ones.

Regardless of your contribution to the family, you can provide substantial financial support that your family can use to cover their cost of living, pay off debts, and various other essential expenses such as healthcare, children’s education, and more.

In a nutshell, here’s the role of life insurance policies in financial planning as follows.

• Provides Financial Protection for Dependents
• Pays Off Debts and Liabilities
• Covers Final Expenses
• Acts as an Income Replacement
• Supports Retirement Planning
• Assists in Estate Planning
• Equalizes Inheritance
• Builds Tax-Deferred Cash Value
• Supports Business Succession
• Offers Peace of Mind

The Bottom Line: Do I Really Need Life Insurance?

If you want to ensure the long-term financial stability of your loved ones, then it is essential to consider life insurance as an important part of your financial plan. Think about it, whether it's the cash value built over time, or the death benefit your family can rely on, life insurance offers security when it's needed most.

Life is unpredictable, and planning ahead with the right policy can ensure that your family won’t face financial hardships in your absence.

Not sure which type of life insurance fits your needs and budget? Speak with one of our insurance experts to get personalized guidance and a free quote, so if you’re interested contact us today to get started.

FAQ

Why is life insurance important in financial planning?

Life insurance is important because it provides financial safety for your loved ones after your death. Your beneficiaries can use the payout from your life insurance coverage and any accumulated cash value account that grew over time to cover essential expenses such as living costs, children’s education, healthcare costs, and more. Most importantly, it will help your family mitigate financial burdens in your absence, which is crucial especially if you want to ensure that they don’t face any financial hardship.  

How to use life insurance to build wealth?

If you get a permanent life insurance policy with coverage such as whole life insurance, or universal life insurance, you can earn cash value from interests. Plus, the cash value amount that grows while your policy is active is completely tax-free. So, this will help you accumulate more wealth, which means you’re saving up more!  

Is life insurance worth it?

It depends on your financial goals and priorities. If you prioritize the long-term financial security of your family or loved ones, then it is definitely essential to get life insurance to ensure their financial security.