What are the benefits of life insurance in the US?

How life insurance works in the US

The two branches of insurance are general and protection.

General insurance policies cover loss and damage, which includes buildings, personal possessions, cars, pets and travel. Protection insurance policies are designed for financial matters like disability insurance—and perhaps the most obvious example—life insurance.

The principle is simple. It’s about risk and financial security.

• You estimate how much money your loved ones and dependents (your beneficiaries) would need in order to survive if you were no longer around to support them.
• You find an insurance provider that effectively promises to pay your family that amount of money if you pass away.
• Your insurance provider assesses the risk of that actually happening and calculates how much money to charge you in order to make that risk financially worth their while.
• Any money the insurance provider makes from your policy is then offset against the likelihood of having to pay out.

Life insurance policies are typically purchased with monthly payments called premiums, although some insurers allow quarterly, semiannual, or annual payments. For some policies, the premiums stay the same over time whereas others increase each year. 

Staying insured means keeping up with premiums. If you can't pay your policy, it could be cancelled by your insurance provider and your beneficiaries would not receive any payout.

Top 5 advantages of life insurance in the US

So what are the benefits of buying life insurance in the US? Here are the top 5 advantages to purchasing your own policy:

1. Financial support

For many people, life insurance is the most cost-effective way to ensure the people who depend on you will be taken care of. Not only will it serve as an essential addition to any inheritance or other assets you pass on, but it can also be set up so that your beneficiaries receive payment without federal income tax.

Nothing can replace the personal loss if you pass away, but the financial support of a life insurance policy can prevent the grief of your loved ones from being compounded by hardship.

2. Income protection

A regular income is an irreplaceable asset and the basis of your savings. Most people rely on their salary to cover essential expenses like rent and mortgage payments, electricity bills, food, clothes, property tax and insurance, as well as paying for leisure, entertainment and vacations. Disability insurance is a way of protecting your income if you encounter illness or injury that leaves you unable to work. 

Passing away without a life insurance policy in place means your income disappears forever instead of going towards your family. Purchasing coverage is a quick fix that can help fill the void your sudden passing would create in the both the hearts and finances of your nearest and dearest loved ones. 

3. Debt repayment

Debt doesn't simply vanish if you pass away. For instance, a mortgage loan still must be paid. Since it’s secured on the property you purchased with it, the lender can foreclose on it (legally enforce its sale) if your payments stop for any reason. Debts that aren’t secured like personal loans or credit cards can also negatively affect your estate and potentially limit the inheritance you end up passing on to your loved ones.

Life insurance can yield enough money to settle those debts, leaving your finances unburdened for your loved ones. Some mortgage lenders may even recommend that you purchase a policy to help cover the loan. Consider getting covered today to give your dependents the debt-free future they deserve.

4. Funeral costs

It’s possible to take out a separate insurance policy specifically to cover the cost of your funeral. As an alternative, you can simply ensure your life insurance policy payout is enough to cover end-of-life services instead of taking out two policies. 

Funeral and burial costs in the US average $6,000-$9,000, so including these in your financial planning can reduce future stress for your family.

5. Non-financial benefits

Beyond the purely financial perks, life insurance brings value through the comfort and support you gain by simply having it. Getting insured empowers you and those closest to you to lead confident, worry-free lives for the rest of time. No matter what happens in life, investing in a life insurance policy means you'll remain protected and your family will always be looked after.

There's no price tag on peace of mind, but we at Eleos think purchasing permanent protection comes pretty close. 💜

Other benefits of life insurance in the US

Term life insurance pays out if you pass away, whereas permanent life policies (like Whole Life or Universal Life) can provide living benefits (financial help while you’re still alive).

Cash accumulation

Permanent life policies often include an investment or savings element that establish cash value. This means you might be able to withdraw money or borrow against it later in life.

Childcare and education

Another common reason to withdraw money from life insurance policies or borrow against them is to fund childcare or education, whether it be daycare, private school, or college tuition fees. Given such significant academic costs that only continue to rise, this option appeals to many American families, especially those with kids in higher education.

Loan security

You can even use your life insurance policy as collateral for a loan if it has enough cash value to reassure the lender that you're good for the money. However, if you’re unable to repay the loan, the lender is entitled to recoup what you owe from the policy, which will reduce what your beneficiaries receive.

Different uses of life insurance in the US

Aside from acting as a form of investment or savings, there are plenty of ways to put your life insurance policy to good use:

Business

Life insurance is often utilized by business owners and members of business partnerships. For example, life insurance can help a business continue trading without much disruption even if one of its most important employees passes away. Life insurance can also provide funds for a business or remaining owners to buy back any shares or ownership interests held by a deceased owner, under arrangements such as a buy‑sell agreement. Individuals can even use it as a guarantee of their financial obligations to a business or partnership.

Estate

If you expect to have a substantial or complex estate, you may want to ensure it's distributed according to your preferences when you pass away. Preparing a will is certainly essential, but life insurance can play an important part as well. Although you name your beneficiaries as soon as you take out your policy, you can choose to place it in an irrevocable life insurance trust (ILIT) or another structure ownership so that the payout is allocated according to your specific instructions. This can help manage estate tax exposure at the federal and state level in some cases, ensuring your wishes are carried out as intended.

Various types of life insurance in the US

Most of the aforementioned advantages apply to whole life insurance. This means your policy has no fixed end date and is guaranteed to continue throughout your entire life course so long as all required premiums are paid in full and on time. 

Countless other life insurance coverage options exist, and even those with fixed end dates are worth exploring. Look into term life, level term, decreasing term, increasing term, and joint life before coming to a decision on which is best for you.

Taxes for life insurance in the US

When you pass away, your property generally passes according to your will or, if you do not have a will, under your state’s intestacy laws. For federal purposes, life insurance death benefits are usually received income‑tax‑free by individually named beneficiaries. If the proceeds of your life insurance policy are owned by you and form part of your estate, then they may be included in the value estimate for federal estate tax purposes. If your estate exceeds the applicable federal estate tax exemption at the time of your death, some states will also impose separate estate or inheritance taxes. Structuring the ownership of a life insurance policy through certain trusts or other arrangements can help ensure you keep the death benefit outside your taxable estate so that your beneficiaries may receive more of the proceeds.

Individual needs for life insurance in the US

Not everyone needs life insurance, especially Americans who are already extremely wealthy with ample assets, or people without families and dependents who would face financial hardship upon their passing. If that doesn't sound like you at all, definitely consider getting covered. As for the types of people who get the most benefit out of purchasing a life insurance policy, below are some more specific examples: 

• People with spouses or partners who rely on their income
• Homeowners with mortgages or significant other debts
• Parents of children, whether under or over 18
• Caregivers or anyone supporting others financially
• Anyone who wants to leave money to others
• People aiming to donate money to charity or other causes

Lifelong protection for less than a latte

If you can afford a streaming subscription or a couple of coffees each month, you can likely afford to protect your financial future. The only difference? Life insurance ensures your family is taken care of, debts are paid, and your legacy is secure. Skip one takeout meal this month and lock in protection for the next 20 years. 

That’s a trade-off worth making.