Benefits of Life Insurance

Life insurance can seem complicated, but most policies fall under two broad categories: term or permanent. Both have shared benefits, such as financial stability for your beneficiaries and tax-free payouts. The two types also have individual benefits, like the cash value component tied to permanent life insurance. Discover the shared and individual benefits of term and permanent life insurance before purchasing a new policy.

Lindsey Crossmier, writer for RetireGuide
  • Written by
    Lindsey Crossmier

    Lindsey Crossmier

    Financial Writer

    Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.

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  • Edited By
    Savannah Hanson
    Savannah Hanson, financial editor for RetireGuide

    Savannah Hanson

    Senior Financial Editor

    Savannah Hanson is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.

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  • Financially Reviewed By
    Eric Estevez
    Eric Estevez, Independent Licensed Life Insurance Agent

    Eric Estevez

    Licensed Independent Insurance Broker

    Eric Estevez is a duly licensed independent insurance broker and a former financial institution auditor with more than a decade of professional experience. He has specialized in federal, state and local compliance for both large and small businesses.

    Read More
  • Published: December 5, 2022
  • Updated: January 10, 2023
  • 5 min read time
  • This page features 3 Cited Research Articles
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A qualified expert reviewed the content on this page to ensure it is factually accurate, meets current industry standards and helps readers achieve a better understanding of retirement topics.

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How to Cite RetireGuide.com's Article

APA Crossmier, L. (2023, January 10). Benefits of Life Insurance. RetireGuide.com. Retrieved February 3, 2023, from https://www.retireguide.com/life-insurance/buy/benefits/

MLA Crossmier, Lindsey. "Benefits of Life Insurance." RetireGuide.com, 10 Jan 2023, https://www.retireguide.com/life-insurance/buy/benefits/.

Chicago Crossmier, Lindsey. "Benefits of Life Insurance." RetireGuide.com. Last modified January 10, 2023. https://www.retireguide.com/life-insurance/buy/benefits/.

Key Takeaways
  • Life insurance is a way to leave a financial legacy for your loved ones.
  • The two main types of life insurance are permanent and term.
  • Each type of life insurance has its own advantages.
  • Your financial situation and needs will help you determine which type is right for you.

What Are the Benefits of Life Insurance?

Life insurance is a legal agreement between you and an insurer in which you pay regular premiums in exchange for the insurer providing a set payment to the recipients of your choice upon your death. Life insurance can help to ensure that your loved ones have the financial resources they need, even when you are no longer there to provide for them. But, there are more advantages to life insurance than just the final payout.

1. Financial Stability for Your Loved Ones

The primary aim of most life insurance policyholders is to leave a monetary legacy for your family, providing financial security when you are gone. Recipients might use the money to cover funerary expenses, pay for college or continue life as usual without fear of financial hardship. Note that a life insurance payout is separate from your estate, so it is generally not subject to probate.

2. Tax-Free Payouts

According to the Internal Revenue Service (IRS), life insurance payouts are non-taxable income. Not only does the payout come to your beneficiaries directly, but they won’t have to worry about it being taxed. They can spend the full amount of the payout as they choose to, whether that means paying off a mortgage or planning ahead for future expenses. However, interest is taxable.

3. Cash Value Component

Permanent life insurance policies build up a cash value, which differs from the face value (the ultimate value of the death benefit). Every premium you pay for your policy covers some fees and expenses: the portion that remains builds up and is an extra financial asset that earns tax-deferred interest over time. You can access the cash value when it has reached a threshold. Some use the accumulated cash value to pay premiums in later years.

The accumulated cash value of your permanent policy also allows you to pay down any debts. If you need a loan to cover unexpected expenses, you can use the cash value of your policy as collateral for a loan from your insurance provider that does not require a credit check.

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4. Affordable Premiums

As part of a balanced financial plan, life insurance is a way to prepare for unexpected changes. Premiums, the monthly payments that keep your life insurance active, can be much more affordable than you realize. According to the Insurance Information Institute, most people younger than 50 seriously overestimate how much life insurance costs. In fact, it usually costs less than half of what they expect.

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Benefits of Permanent Insurance

There are several types of permanent life insurance including whole life, universal life and variable life. Most of those include a savings component you can withdraw from, invest with or borrow against. Whole life insurance, the most common permanent policy, has a cash value that grows at a guaranteed rate.

Other Advantages of Permanent Insurance
Consistent Premiums
With term life insurance, premiums can increase with age; with permanent life insurance, your premiums are locked in at the starting rate.
No Expiration Date
Permanent policies do not expire, no matter how many birthdays you celebrate.
Tax Advantages
The growth of the cash value of your policy is tax-deferred and you don't pay income taxes on any dividends.

Benefits of Term Life Insurance

Term life insurance policies cover only a certain agreed-upon time period. Because of the shorter nature of the policy, their premiums tend to come with a lower cost, making them attractive to younger or less financially secure buyers.

Other Advantages of Term Life Insurance
Flexibility
Term life insurance covers anywhere from one to 30 years. Buyers aren’t tied down to a lifetime coverage commitment. Plus, there are many options and provisions to choose from.
Simplicity
With simple policy structure and provisions, term life policies are generally easier to compare and understand.
Financial Protection
For those with young families or changing circumstances, the temporary nature of a term policy can be the best choice by offering protection and coverage when they matter most.

How To Get the Most Advantageous Coverage

Your requirements for life insurance coverage will be unique to you and your circumstances. The cost of coverage will depend on many variables, including your age, health, financial resources and the type of coverage you choose. Keep your specific needs in mind when buying life insurance.

For a young person just starting out, whose situation might change at any point, term life insurance may be a wise choice.

An established professional with children, on the other hand, might prefer the fixed security of permanent life insurance.

Consult with trusted advisors to research your options and don’t hesitate to ask questions.

Editor Samantha Connell contributed to this article.

Last Modified: January 10, 2023
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3 Cited Research Articles

  1. Croll, M. (2021, September 15). The Pros and Cons of Permanent Life Insurance. Retrieved from https://www.valuepenguin.com/life-insurance/permanent-life-insurance
  2. Insurance Information Institute. (n.d.). The I's on Insurance. Retrieved from https://www.iii.org/video/the-is-on-insurance-life-insurance
  3. Internal Revenue Service. (n.d.). Life Insurance and Disability Insurance Proceeds. Retrieved from https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds/life-insurance-disability-insurance-proceeds