Benefits of Life Insurance
Two of the most important benefits of Life Insurance are
protecting loved ones against the financial consequences of the
insured's death and the living benefits of life insurance.
Financial Consequences of Death
The financial consequences of death can be devastating. Nothing
can replace a spouse, a parent, child, brother, or sister. But, the
practical and financial consequences of death are another matter.
Without life insurance, surviving dependents can suffer extreme
financial hardship as a result of an individual's death. There
exists the possible loss of future income as well as a number of
sudden expenses that occur as a result of death.
The Consequences of Dying Too Soon
According to mortality statistics, a certain number of people
will die each year before reaching their normal life expectancy.
When a breadwinner dies prematurely, the loss to the family can be
tragic in so many ways. The survivors are suffering deep personal
grief and must face some very serious financial consequences
because they can no longer rely on the breadwinner's income.
A. Final Expenses
We frequently hear about the high cost of living, but dying can
be expensive too. Look at some of the common costs that must be met
when a person dies:
- Funeral Expenses
Funeral costs can vary widely depending upon the type of
service, area of the country and other factors. According to the
National Funeral Directors Association, the average cost of a
funeral today is approximately $6,560 before cemetery
costs.1 In addition to the cost of the funeral, there
may also be burial expenses (if separate), florist's fees, and
prepaid expenses for future care of the burial site. Whatever the
costs, they will most certainly increase over time, due to
- Estate Administration
Executor's fees and fees for the executor's attorney will make
up most of this cost. Other expenses may include court or probate
costs, the cost of appraising estate property, the cost of insuring
estate property while the estate is open, maintenance or repair of
estate property; particularly if it is to be sold, the cost of
defending a will if it should be contested, auctioneer's fees and
so on. The larger and more complex a person's holdings, the larger
the administration expenses will likely be. But even modest estates
may incur significant administration expenses.
This could be another major cost. It includes automobile loan
balances, credit card balances, promissory notes, bank loans and
final expenses of the last illness - medical expenses that might
not be covered by Medicare or health insurance. Accrued taxes may
also be considered debts. This would include unpaid income taxes
(federal, state and local), property taxes, and any other taxes
that were incurred but not paid.
- Estate Taxes
Death taxes -federal and state- are yet another cost. Such taxes
are especially important in large, unplanned (or poorly planned)
estates. The federal estate tax rates are progressive. The larger
the estate, the higher the tax-as much as 55%. This tax generally
must be paid in cash within nine months of death. State inheritance
and estate taxes vary widely.
B. Loved Ones' Future Security
In most cases, there are also obligations that extend into the
future-security for those left behind. There may be a spouse who
needs living expenses, mortgage payments to be made or children to
raise and educate. If the deceased was an income earner, surviving
dependents will have to manage without that income. If the deceased
stayed at home caring for children, the surviving partner will
likely face a substantial increase in expenses to replace the
deceased's contributions to the family lifestyle.
No matter how many or what kind of financial obligations an
individual leaves at death, there's only one thing that will
satisfy them-money. For this reason, a person who wants to relieve
his or her family of these obligations will plan to leave them with
money sufficient to cover all these needs.
C. Income Needs
- Dependency Period
Funds need to be available during a time when it may be hard for
the surviving spouse to work due to children. With the high cost of
child care, a surviving spouse may not be able to make enough money
to afford child care expenses.
- Survivor's Blackout Period
The "widow's blackout period" is the period of time during which
social security has stopped paying the surviving spouse because
there are no longer any dependent children. The widow would no
longer receive benefits from social security until age 60.
- Survivor's Retirement
Providing funds for the surviving spouse's retirement is an
important consideration. Especially if the spouse does not already
have his or her own retirement plan.
D. Mortgage Payments/Rent Fund
The emotional effects of losing a loved one takes a long time to
get over. Coupled with the need to uproot the family, it could make
a difficult time even worse. So, when planning on family financial
needs, things to look at are either paying off a mortgage or having
enough funds available to make mortgage/rent payments for a period
E. College Education
Being able to send their children to college and give them the
best education possible has always been a dream for parents. The
death of one parent should not hamper this dream from taking place.
Life insurance proceeds can help pay for children's college
Retirement/Savings - Building an Estate
The following are some ways to build that estate to leave to
your loved ones:
A. Life Insurance
A method of estate building is life insurance. It has the
advantage of creating an immediate estate at the time it is most
needed-when the insured dies. Another advantage is that it can be
tailored to meet the full amount of obligations at death.
Life insurance proceeds are generally payable in full to the
beneficiary shortly after the insured's death. How much is paid
depends upon the death benefit of the policy.
One could deposit money in a savings account at regular
intervals. These savings might provide an estate that could meet
all obligations. There are, however, a couple of problems with
savings accounts. First, since money can be easily withdrawn, the
savings balance may not increase.
A second problem is that one might not live long enough to
accumulate sufficient savings to handle all obligations at death.
So savings, while a good practice, may not be absolutely relied
upon to create an adequate estate.
Third, except for certain types of accounts, such as IRA's,
earnings from savings accounts are taxed as current income,
necessitating more deposits to reach retirement objectives.
C. Other Investments
Investments can also provide significant returns. Lots of people
have created additional savings through securities (such as stocks
and bonds) and real estate. But lots of people have also lost money
to investments that either failed or did not meet expectations.
There are no guarantees when it comes to investments. There's
always an element of risk. And just like savings, one might not
live long enough for an investment program to create a large enough
estate. In some instances, these investments may not be at maximum
value when needed.
Life Insurance as the Solution
If people could predict the future, most would rush out and
purchase as much life insurance as they could obtain. Life
insurance can provide the money a family needs for continued
security when it needs it the most. That's the most important job
of life insurance. It provides a new source of cash and income so a
surviving family can continue to live in comfort after the death of
its primary income earner.
Living Benefits of Life Insurance
We've talked about the death benefits of life insurance - the
benefits the beneficiaries will receive when the insured dies. But
life insurance can also provide benefits for the policyowner or
insured while he or she is living. Living benefits are another way
life insurance can help people.
Some types of life insurance policies that last for the entire
life of the insured are called permanent insurance. These policies,
in addition to their death benefit usually accumulate cash values.
Prior to the insured's death, this cash value belongs to the
policyowner and can benefit him or her in many ways.
The premiums paid for this kind of life insurance are higher
than those paid for term life insurance. Term Insurance pays a
death benefit only if the insured dies during the term of the
policy and accumulates no cash values.
Withdrawals and Loans
Some permanent life policies permit withdrawals from the cash
value-money to be used by the policyowner for any purpose. The
amount withdrawn, however, is generally subtracted from the
policy's face amount (the death benefit).
The policyowner can also take out loans from the insurance
company using the policy's cash value as collateral. The loans must
be paid back or the amount of any outstanding loan and interest
will be deducted from the policy's face amount when the insured
For Retirement Planning
When people get older, they may begin to look at their life
insurance policies in a different light. What had provided
protection against the financial consequences of premature death
may now be used to help them enjoy their retirement years. The cash
value can be used as additional income during retirement (e.g. to
help pay for that trip of a lifetime they've been planning to take,
to buy that new car or to help provide college education for
grandchildren). It's wise to remember, however, that life insurance
is not an investment. Its main purpose is to provide a death
benefit. There are other and possibly better ways to save for
retirement, but life insurance is unique in that it can offer
payment of the full face value of the policy when the insured dies
while accumulating a cash value during the insured's lifetime.
For Education Needs
Similar to retirement needs, cash values may be used for
educational needs. Funds could come from a policy taken out on the
life of an infant with cash values accumulating until he or she
reaches college age. Or it could be part of planning for the future
with a policy on the life of one parent or perhaps both parents.
The policy protects against the insured's premature death and, in
the event he/she lives on, can provide cash values to help pay
The Consequences of Living Too Long/The Retirement
During 40 or more years of working, a large amount of money can
pass through an income earner's hands. Most people's earnings
levels do increase over time, through raises, promotions, fringe
benefits or incentive plans. And with each increase, they gradually
become accustomed to a higher and higher standard of living.
- Purchase a larger home
- Dine out more often
- Buy new cars more frequently
- Provide their children or grandchildren with college
- Or take expensive vacations
As people reach old age, their earnings begin to diminish. Many
people save very little for the future; instead, they live for
today and let tomorrow take care of itself.
Financial problems eventually become severe when people attempt
to retain the life-style they enjoyed when they had more income.
They are forced to face reality; the money won't stretch far
enough. They have to either take a part-time job or lower their
standard of living considerably.
Life Insurance as the Solution
Life insurance products can offer a practical solution to the
retirement need. Through the benefits of life insurance, a retired
couple need not become dependent on outside sources for their
financial care. Life insurance can provide cash or lifetime
1 National Funeral Directors Association, NFDA
General Price List Survey, 2010.
Insurers and their representatives are not permitted by law to
offer tax or legal advice. The general information here was written
to support the sales, marketing or service of insurance policies
offered by Bankers Life and Casualty Company. Based upon
individuals' particular circumstances and objectives, they should
seek specific advice from their own qualified and duly licensed
independent tax or legal advisors. No one may rely upon or use the
information here for the purpose of avoiding any tax or tax penalty
that may be imposed by the Internal Revenue Code or other