Number 2: To help pay off a mortgage or other debts
If you share the home you own with your partner, children or other loved ones, life insurance can help pay off the balance of your mortgage in the event of your death. This may make it possible for your spouse or family to stay in their current home despite the loss of your income—something that’s important to a lot of parents.
Life insurance can also help pay off outstanding loans, lines of credit or other consumer debt, as well as funeral costs and burial expenses. Ideally, your policy’s death benefit will be large enough for your family to maintain their current lifestyle (or at least a similar one) without your income.
Number 3: To transfer wealth to the next generation
Want to leave your kids or grandkids an inheritance? A life insurance policy can be a tax-efficient way of doing that.
“Someone nearing retirement may have no debts, and their children may be grown and no longer dependent, but they have the goal of passing wealth to the next generation,” Little says, adding that life insurance can help transfer their wealth.
This typically involves purchasing whole life insurance (a form of permanent life insurance) and making your children or grandchildren the beneficiaries. Unlike term life insurance, which only offers coverage for a set period of time, whole life insurance guarantees an end-of-life payout. And the death benefit is non-taxable, so your beneficiaries won’t pay income tax on the money they receive.
Number 4: To make a philanthropic impact
A lesser-known function of life insurance is that it can be used to efficiently transfer funds to a non-profit organization. “Some individuals have a particular charity they are very passionate about, and they want to leave a legacy that has a positive impact on others,” Little says.
By naming a charity as a beneficiary of your life insurance policy, the money passes tax-free from the insurance company to the charity. And unlike when making a charitable donation through your will, the payment avoids probate and bypasses your estate, so it cannot be contested by family members or other beneficiaries.
Little suggests asking your financial advisor or insurance provider about options for philanthropic giving. Whether you want to help fund cancer research, support animal welfare and human rights or give back to your alma mater, your life insurance policy can help make it happen.