x
Fact-checked with HomeInsurance.com
By Carly Severino Carly Severino's Twitter profile
Planning for life after death is never an easy topic to approach. However, doing so now can provide your loved ones with great benefits in the long run. One of the best ways to ensure your loved ones are prepared to handle life following your death is by taking out a life insurance policy. There are many things that life insurance covers, many of which can help ease the burden associated with settling your affairs after you’ve passed on.
According to an insurance expert, Laura Adams, “The purpose of life insurance is to make sure that people who depend on you, such as a spouse, partner, children, and aging parents, wouldn’t be hurt financially after your death.” There are many things that life insurance covers that can help reduce the financial burden associated with settling your affairs, including funeral costs, debt settlements, and estate planning.
Whether or not you’re the main source of income for your family, you likely help cover the cost of rent, mortgage, groceries, utilities, child care, and other household necessities. For this reason, it’s recommended that people take out a life insurance policy that’s equal to 10 – 15 times their current income. This will help your loved ones maintain their current lifestyle after you’re gone, reducing their financial burden following your death.
“If you have any co-signed loans, such as home, auto, or student loans, the other party would be fully responsible for your debt after you die,” says Adams. “So, it’s critical to have enough life insurance to cover your portion.”
Even debts that aren’t officially co-signed by a family member or loved one may become their financial responsibility after your death. Life insurance policies help cover the cost of these debts so your loved ones can settle any remaining balances in your absence without experiencing financial turmoil.
If you’re financially responsible for your child’s college tuition or education, it’s a good idea to factor in these costs when determining how much coverage you need. The average cost of college tuition according to a recent 2020 Sallie Mae survey is as follows:
Life insurance beneficiaries can spend the payout however they like, meaning the proceeds can help them pay for their ongoing education in the event of your death.
Life insurance policies can also be used for covering the cost of end-of-life expenses. It may come as a surprise to learn that funeral costs can be anywhere between $7,000 and $12,000.
Be sure to review the costs of your desired burial wishes and discuss your end-of-life plan with your family so they can make the appropriate arrangements. This will also help you select the amount of coverage necessary to aid in their financial obligation for your funeral expenses.
From daycare and after-school programs to nannies and other expenses, life insurance policies can help cover any child care expenses for which you currently pay for or do yourself. By taking out a life insurance policy, you can effectively cover these costs and allow your loved ones to continue living the same quality of life they have come to enjoy.
Many life insurance policies provide an accelerated death benefit rider, which provides the policyholder with access to a portion of their death benefit before their passing if they’ve been diagnosed with a terminal illness. This helps you pay for medical expenses while you’re still alive, reducing the financial burden on your loved ones after your passing.
While this is a great benefit to have, policyholders should know that by removing a portion of their death benefit, they will effectively reduce the total amount paid out to their beneficiaries after their death. For example, if you have a $500,000 life insurance policy and use $100,000 to pay for medical expenses while still alive, the beneficiary will be paid out $400,000 rather than the full amount indicated in the policy details.
In addition to funeral costs, life insurance can cover the cost of estate planning following one’s death. Estate planning is a little different from end-of-life expenses in that it involves securing an attorney to close out any remaining accounts in the decedent’s name and officially report the death to the county and IRS.
“A life policy can be used as an estate planning tool to make sure your heirs could cover legal fees and taxes,” says Adams. Many people fail to realize that decedents will still owe taxes to the IRS, and a life insurance policy can help them cover these costs so they are not incurring unnecessary financial burdens.
“If you want to leave a financial legacy with particular organizations or charities, you can include them as a life insurance beneficiary,” says Adams. This is a great way for policyholders to not only ensure their loved ones are taken care of but to also make sure they can still contribute to the causes they care about following their death.
But a legacy doesn’t just mean listing a charitable organization as a beneficiary. You can also set aside enough money for your loved ones to not only take care of immediate financial needs following your death but to also help them plan for their long-term financial goals. Again, beneficiaries can use the proceeds for whatever they want, so leaving behind a large sum or planning a trust fund with their life insurance payout can help them put a down payment on a home, start a business, or further their education.
Whole life insurance covers many helpful things for policyholders and their beneficiaries, it’s equally important to understand the things that life insurance does not cover. The following outlines some of the most notable items that are not covered by life insurance:
Policyholders decide on their death benefit coverage at the time they apply for their policy. It’s generally recommended for individuals to take out a policy in the amount of 10 – 15 times their current income as this will ensure all expenses are accounted for after their passing.
After the policy holder’s death, the beneficiary will need to file a claim with the insurance carrier to receive their payout. This can be a lengthy process and can take a few weeks for the payout to finally arrive. Depending on how the policyholder set up their payout stipulations, beneficiaries will either receive the payout in one lump sum or will receive the funds in monthly or annual installments.
