A good life insurance policy provides you and your family with financial security and protection unavailable from any other source. There are benefits and advantages in a life insurance policy that you won’t find in the stock market, in government-sponsored retirement plans, in a real estate portfolio, or in any other investment or financial vehicle.
Some of the provisions, features, and guarantees are only available in certain types of life insurance policies, but several are available in every life insurance policy on the market.
In this article, we’ll review five of the most valuable advantages and benefits that life insurance provides, and we’ll highlight which ones are available in which types of policies.
If you’re not familiar with the different types of life insurance, you can quickly learn the basics in our No-Nonsense Life Insurance Guide.
1. Life Insurance Protects Your Family
Every life insurance policy – by definition – provides a death benefit that the insurance company will pay to your beneficiary (your spouse and/or children, for example) so that your family’s financial needs will be met if you die.
There are only a few conditions attached:
- Satisfactory documentation – a certified copy of the insured’s death certificate and other documents such as a police report in case of an accident – must be submitted before a claim will be paid.
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Death must have occurred during the term of the policy. If the policy has expired or wasn’t in force because you stopped paying the premiums, the death benefit won’t be paid.
Note: Industry statistics show that only a small percentage of term life insurance policies ever pay a death benefit because most insured individuals outlive their term policies.
- During the “contestability period” (typically the first one or two years a policy is in force), the insurance company will reject a claim in the case of suicide of the insured, or if the application contains material misrepresentations – misleading, incomplete, or untrue statements that affect the applicant’s insurability. This restriction drops off at the end of the contestability period.
Life insurance death benefits are paid directly to your beneficiaries without going through probate. This avoids the publicity of the probate process and also the cost of probate, which can be quite expensive.
2. Life Insurance Can Provide a Cash Value
Permanent life insurance policies (and some term policies with a “return of premium” rider) build cash value. The cash value is an integral part of the policy, and you may borrow against it or, in some cases, actually withdraw a portion of it, and use the money for any purpose, such as paying off debt, buying a home, investing in real estate, “self-financing” a major or not-so-major purchase, and so forth.
Whole life insurance policies guarantee the growth of your cash value over time. Even before you purchase a policy, the company will provide a year-by-year table showing the exact guaranteed minimum cash value of your policy from the anticipated date of purchase through age 121 – at which point the company will simply give you the cash value (assuming they haven’t paid a death benefit to your beneficiaries before then).
Permanent life insurance policies other than whole life have cash values that are not guaranteed. They may go up, down, or disappear entirely, depending on such variables as the cost of insurance, interest rates, stock market values, and so forth.
The types of permanent life insurance policies that typically do not guarantee their cash value – and sometimes don’t even guarantee a death benefit! – include universal life, indexed universal life, variable life, and combinations of these types.
3. Life Insurance Policies Come with Tax Benefits
All life insurance policies offer at least one tax benefit. Some offer multiple benefits.
With all life insurance policies, no income tax is due on the death benefit paid to the beneficiaries when the insured passes away. Even if your beneficiaries receive millions of dollars in death benefit, the money is income tax-free.
Yet another advantage of life insurance: Under current law, growth in your policy is tax-deferred
Policies that provide for cash value accumulation and/or the payment of dividends – this excludes most term policies – allow your cash value and accumulated dividends to grow income tax-deferred.
If your policy builds cash value you can borrow against, those loans are income tax-free. Even dividend withdrawals are income tax-free, as long as the withdrawals don’t total more than the total premiums paid into the policy (called your basis).
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4. Life Insurance Can Give You Flexibility
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Using life insurance to protect your family in the case of your death – and as an alternative to investing to build retirement funds, college funds, emergency funds, vacation funds, and so forth – gives you great flexibility.
While some types of policies, such as basic term policies, only provide a death benefit, other types, particularly high cash value dividend-paying whole life insurance policies, provide guaranteed competitive growth, tax advantages, safety, easy access to your cash in the policy, and flexibility unmatched by any other strategy for cash accumulation.
The right kind of life insurance policy lets you access virtually all your cash buildup with no income tax liability – a huge advantage
An excellent way to withdraw money or retirement income from a cash value policy in retirement is to withdraw dividends up to your basis. Then, when your withdrawals equal your basis, you can continue receiving cash by taking policy loans. If you pass away while your policy is in force but before you have repaid your loans, the insurance company will simply deduct the repayment amount from the death benefit it sends to your beneficiaries. Again, the loan amount is not taxable.
Caution: Do not let your policy lapse, particularly if you have outstanding loans. (A life insurance policy will lapse if you stop making premium payments and if the policy’s cash value is exhausted.)
If your policy lapses for any reason before you have repaid your loans, this will trigger an income tax liability on the outstanding loan balance. Therefore, prudence suggests that you work with a Bank On Yourself Professional who understands these issues and can help ensure you don’t run the risk of your policy lapsing.
For more information, see our article about the advantages of life insurance policy loans.
A few companies offer policies that guarantee to pay you the exact same growth on your money, even when you’ve borrowed against it! Most companies will pay a different dividend on funds you’ve borrowed against, so it makes sense to look for a company that will pay the same dividends whether you have a loan against your cash value or not.
Permanent life insurance policies also offer varying degrees of flexibility in terms of the amount of premiums you must (or may) pay, how long you must continue to pay premiums (not all forms of life insurance require you to pay premiums until you die!), availability of loans, and so forth.
5. Life Insurance Has Guarantees
With several kinds of life insurance, you are guaranteed a specific amount of coverage for a certain premium. Term life insurance and whole life insurance offer this benefit, although term insurance places a limit on how long the coverage will remain in force.
Other types of life insurance, such as universal life, indexed universal life, and variable life, may lower the amount of coverage and/or the increase premiums due – even drastically.
Virtually all whole life policies guarantee your minimum cash value growth year-by-year into the future. Dividend-paying whole life insurance policies also provide you a non-guaranteed projection of how your policy will grow if the current dividends continue to be paid each year.
Beyond your insurance company’s sheer financial strength, you have four safety nets to help guarantee the company will be able to pay its claims.
This is why life insurance may be the safest place to put your money.
Summing up the Benefits and Advantages of Life Insurance
Nothing can protect your family and other beneficiaries in case of your death like a life insurance policy. From the moment your first premium is paid, full protection is yours (except in certain limited cases for high-risk individuals, where the death benefit grows to its full amount over the first few years).
And because of its flexibility, growth potential, and guarantees, whole life insurance provides unparalleled opportunities for growth combined with safety combined with tax advantages – while still providing guaranteed protection for your family and the organizations you care about.
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