No doubt protecting your family financially is high on your priority list.
Taking out a life insurance policy helps your beneficiaries pay necessary expenses such as a mortgage and other types of debt. Yes, life insurance can cover these huge expenses, but don’t forget the little things, too.
What Does Life Insurance Cover?
Life insurance is coverage for your loved ones should you pass away. It’s financial protection. If you die when your policy is still active, your beneficiary will be able to file a claim for a life insurance death benefit. This is a chunk of cash — often tax-free — that a beneficiary receives to pay for expenses, including ones you would’ve paid for in the future.
As for how much life insurance you get, it depends on the amount of coverage you purchase. Generally speaking, the more expenses you have, the more coverage you probably need.
What Can Life Insurance Pay For?
A life insurance payout can pay for both large and small expenses. Your beneficiary can use the money in any way.
No matter your marital status, with or without kids, the reality is that funerals aren’t cheap. According to the National Funeral Directors Association, the median funeral cost hovered around $7,360.
End-of-life expenses can add up as well. You’re looking at an average of $11,618 according to the National Bureau of Economic Research. These expenses can include nursing home and medical necessities. Your beneficiary can use the payout to pay these bills.
A life insurance payout helps those who rely on your income to maintain their current standard of living. It’ll give them some breathing room too so it isn’t a huge burden to make payments on time.
Breadwinner or not, you’re an essential part of running the household. Your income helps your family pay bills like groceries, cleaning supplies, and even gas. Even if you don’t bring home a paycheck — that’s you, stay-at-home parents — life insurance can help cover expenses that your beneficiary will need to pay for if you’re not around, like childcare.
Speaking of childcare, these costs can add up, especially if you have more than one child. Think expenses like preschool, after school activities, extra groceries, and college savings. In fact, the average cost of childcare is $11,666 each year — that doesn’t include extra curricular activities which costs at least $739 a year.
A place to live is pretty non-negotiable. If you were to pass away and your partner finds it difficult to make the mortgage payments, they’re in for a rough ride.
Your death benefit can alleviate some of that burden for the time being until your family can make a more rational decision — pay off the mortgage, downsize, or move to a more affordable location.
If you have mortgage protection insurance (MPI), your policy may pay off your mortgage balance but not provide a payout to your beneficiaries. Term life insurance payouts, on the other hand, can be used to pay for any expenses, like your mortgage or other housing related expenses.
Whether it’s student loans, car loans, or credit card debt, your estate may be left to pay for these once you pass on.
If you have a cosigner, that person will be responsible for the remainder of the debt. Even if it’s a loan you took on yourself, your beneficiary can use the funds to cover ones directly related to their lives, such as a car loan or home equity line of credit.
Maybe you wanted to help a family member pay off their debt or you’re saving for your child’s first year of college. No matter the reason, you can make sure you have enough coverage so that the payout can go towards some of these items.
Sure, you want the bills to be paid in your absence. But making a gesture such as the ones mentioned above can be equally as important.
Are Life Insurance Proceeds Considered Taxable Income?
There are some cases where your beneficiaries will need to pay. This could include any interest earned, like ones from a insurance policy’s cash-value component.
The good news is that life insurance doesn’t have to cost an arm and a leg. Even a small amount of coverage is better than none, providing your family with the space to mourn and map out plans for the future.