Why Should I Buy Life Insurance?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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The primary purpose of life insurance is always going to be to provide a source of income to loved ones in case of your death, but it can also serve other functions. Life insurance can also act as an estate planning tool, as a means of buying out a business interest, or for financial management.

TIP: When you shop for life insurance, keep in mind it is designed as a way to help your loved ones move on after your death. Any other uses may be beneficial to you as well, but should be considered secondary.

Life Insurance as a Financial Tool

Life insurance is commonly used as an investment vehicle. Some permanent life insurance plans create an investment account that invest a portion of your premium payments across stocks, bonds, or mutual funds which allows money to grow with taxes deferred. With their investments, variable life and universal life policies accrue a cash value, which is a tax free accumulation of funds that can add to the amount of money paid out upon your death or serve as a source of funds should you need a policy loan.

BE CAREFUL! There are tax laws governing how much you can sock away in a life policy. For instance, if the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code, the life insurance policy could become a Modified Endowment Contract (MEC). Taxation under a MEC is similar to taxation under an annuity.

Life insurance as an investment can get complicated. The best thing to do is check with an investment advisor or a CPA or a tax attorney to make sure that your use of life insurance as an investment vehicle does not create a bigger tax problem now or at your death.

Life Insurance and Estate Planning

Buying life insurance now can be used for estate planning for the future. Proceeds from life insurance that are received by the beneficiaries listed in your policy are generally income tax-free. For estates over several million dollars, life insurance can be use to pay estate taxes preserving the wealth for your beneficiaries. Again, using life insurance as an investment can become very complicated and the use of an investment advisor and/or CPA is required.

Life Insurance for Your Business

There is a type of term policy, typically named Key Person Insurance, which allows you to preserve your business ownership. When you are a partner in a business, then your other partners have an insurable interest in your life because you have contributed money or time to the partnership. If you were to die, then the partnership will suffer a loss. You can, then, purchase a life insurance policy for your business to help it recover if you should suddenly die. The proceeds from your life insurance policy would go to help the business that you helped grow. If this is something important to you, then consider getting a life insurance policy for the business.

Life Insurance for Your Needs

If you are not a business owner or you do not have a spouse or children or an estate over several million dollars, should you still purchase life insurance? They answer to that question depends on your life goals, your age and what final expense you would like paid after your death. The primary reason for buying life insurance is to protect anyone that has an interest in your life after you pass away. If you have someone with a financial interest in your life, or who relies on you for support, then life insurance is the right thing for you. If not, you can still buy life insurance if you have an opportunity to get a good rate and intend on having a family in the near future.

Buying life insurance for any other purpose other than as a death benefit is very complicated. IRS tax rules should be considered and you should have an expert guide you through these rules.

Let Freeadvice.com help you. You can ask an insurance agent to advise you on the best life insurance plan for you and all the life insurance uses for those plans that would benefit what you would like to accomplish. Once you have decided what you need from life insurance, shop for quotes by using the Free Advice life insurance quote center.

Read more articles to help you understand life insurance by clicking here.

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