What is the Main Benefit of Life Insurance?

iQuanti: Financial experts have long recommended that every adult should have a life insurance policy. However, what is it that makes having this coverage so important, and what are the advantages it can provide? In this post, we'll explore three important reasons for getting a life insurance policy.

How Does Life Insurance Work?

Before we can talk about the main benefits of life insurance, it's important to understand how life insurance works exactly. 

Life insurance is a contract between you and an insurance company to insure your life. When you pass away, the life insurance policy will pay a death benefit to the people you've named as your beneficiaries. 

Until this happens, you'll make payments to the life insurance policy to keep it active. If it's a term life insurance policy, 100 percent of your payment will go toward the premiums for the death benefit. 

If it's a permanent life insurance policy (such as whole life or variable universal life), then some of the payment will go towards the death benefit premiums while the rest will go towards the cash value of the life insurance policy. Cash value is like a bank account within the life insurance policy that grows tax-deferred over time.

What Are the Main Benefits of Life Insurance?

There are several benefits depending on how you plan to use your life insurance policy.

Income Replacement

For most families, the primary benefit of life insurance is income replacement. If you were no longer here and couldn't provide for your family, then this would create a significant financial burden for them. To protect against this, it's recommended to buy a life insurance policy so that the death benefits can be used as if you were alive and bringing home a paycheck.

For this reason, most experts recommend setting your coverage for somewhere between 10 and 12 times your annual salary. If both spouses work, they should get separate life insurance policies relative to their earnings.

Leaving an Inheritance

Even if you no longer require income replacement, a life insurance policy can still be a tool to leave behind a generous windfall to your loved ones. The benefit could be used to help out your adult children financially or even pass it down to your grandchildren to support things like paying for college.

Borrowing Against the Cash Value

If you opt for a permanent-style life insurance policy, you can borrow against it once the cash value reaches a certain point. This loan will be tax-free and can be used for other financial gains such as paying off high-interest debt, buying a second property (like a vacation home or rental), or even starting a new business.

Essentially this turns your cash-value life insurance policy into your own private lender. For this reason, some financial experts argue that the cash value component of life insurance can be more beneficial than the actual death benefit.

The Bottom Line

While many people see the main benefit of getting life insurance as income replacement, the proceeds can also be used to leave a financial legacy to your loved ones and future generations. Additionally, some financial experts seek permanent life insurance policies because they see the advantages of borrowing against the cash value and using it to acquire additional income-producing assets.