Life insurance is primarily known for its death benefit – a lump sum payment to beneficiaries upon the policyholder's passing. However, modern life insurance policies offer a range of benefits that extend far beyond this traditional feature.

This article aims to reveal the hidden benefits of life insurance, exploring how these policies have evolved into versatile financial tools that can provide value throughout the policyholder's lifetime.

Peace of mind for family members

One of the most significant yet often overlooked benefits of life insurance is the peace of mind it provides to both the policyholder and their beneficiaries, typically family members. This emotional and financial security can have a profound impact on overall well-being.

The 2022 Insurance Barometer Study by LIMRA and Life Happens revealed that 68% of life insurance owners reported feeling financially secure, compared to just 47% of non-owners¹ This stark contrast underscores the psychological benefit of knowing that loved ones will be financially protected in the event of an unexpected loss.

Moreover, the study found that 44% of households would face financial hardship within six months if the primary wage earner died unexpectedly. Life insurance can provide a crucial safety net in such scenarios, helping alleviate the stress and anxiety associated with potential financial instability.

There are many real-life examples of families benefiting from this peace of mind. For instance, Sarah, a 35-year-old single mother of two, shared: "Knowing my kids will be financially secure if anything happens to me - it's like a weight has been lifted off my shoulders. I can focus on living my life and enjoying time with my children without constant worry about 'what if'".

Final expense coverage

Life insurance can play a crucial role in covering final expenses (e.g.,costs associated with death, including funeral arrangements, burial or cremation, medical bills, and other outstanding debts), relieving the financial burden on family members during an already difficult time.

According to the National Funeral Directors Association, the median cost of a funeral with viewing and burial is now somewhere around $8,300² This significant expense can be a substantial financial burden for many families. Life insurance helps ensure that these costs are covered, allowing family members to focus on grieving and honoring their loved one without the added stress of covering the financial burden that often accompanies the death of a loved one.

Common final expenses that can be covered by Final Expense life insurance include:

• Funeral and burial costs
• Outstanding medical bills
• Legal fees for estate settlement
• Remaining mortgage payments or rent
• Credit card debts and other outstanding loans

By helping to cover these expenses, life insurance provides invaluable support to families during a challenging time, ensuring that financial concerns don't compound their emotional distress.

Supplementing retirement income

Certain types of life insurance, particularly permanent policies like whole life or universal life, can be powerful tools for supplementing retirement income. These policies accumulate cash value over time, which can be accessed during the policyholder's lifetime.

About 90 million families rely on life insurance for economic protection, including financial and retirement security³ This statistic demonstrates that many policyholders recognize the potential of life insurance as a supplementary source of income in retirement.

There are several ways to utilize life insurance for retirement income:

• Withdrawals: Policyholders can withdraw from the cash value of their policy. These withdrawals are generally tax-free up to the amount of premiums paid.
• Policy loans: Borrowing against the cash value of the policy. These loans are not considered taxable income as long as the policy remains in force.
• Dividends:Some whole life policies pay dividends, which can be taken as cash or used to purchase additional coverage – these withdrawals are typically taxed as ordinary income.

David, a 65-year-old retiree, shares: "I've had a whole life policy for 30 years. Now that I'm retired, I'm using the cash value to supplement my income. It's giving me an extra cushion that allows me to travel and enjoy my retirement without worrying about running out of money."

Funding for education

Life insurance can be a valuable tool for funding a child's or grandchild's education. It provides a financial safety net for future generations, ensuring that educational goals can be met even if the policyholder is no longer there to provide support.

There are several ways to structure a policy for educational purposes:

• Naming a child as a beneficiary: The death benefit can be used to fund education if the policyholder passes away.
• Using cash value: For permanent policies, the accumulated cash value can be borrowed against or withdrawn to pay for education expenses.
• Setting up an Irrevocable Life Insurance Trust (ILIT): This can provide funds for education while potentially offering tax advantages.

According to the College Board, the average cost of tuition and fees for the 2024-2025 school year was $11,610 for in-state public colleges and $43,350 for private colleges⁴ Life insurance can help ensure that these significant costs don't become a barrier to education for the next generation and help prevent the financial strain often created by student loans.

Business continuity and succession planning

For business owners, life insurance plays a crucial role in ensuring business continuity and facilitating smooth succession planning. This is particularly important given that, according to a survey by the National Association of Insurance Commissioners, 71% of small businesses are dependent on one or two key people for their success.⁵

Life insurance can support business continuity in several ways:

• Key Person Insurance: This type of policy protects a business against the financial loss it would suffer if a key employee or owner were to pass away unexpectedly.
• Buy-Sell Agreements: Life insurance can fund buy-sell agreements, ensuring a smooth transition of ownership if a business partner dies.
• Succession Planning: In family-owned businesses, life insurance can provide the liquidity needed to equalize inheritances among heirs when the business is passed down to one child.

For example, James, the owner of a successful marketing agency, shares: "My business partner and I took out key person insurance on each other to ensure that if something happened to one of us, the business could weather the storm. It's not just about money - it's about giving our employees and clients confidence in the stability of our company."

Charitable giving

Life insurance offers a unique way for individuals to leave a lasting legacy through charitable donations. By naming a charity as a beneficiary of a life insurance policy, donors can potentially leave a substantial gift separate and apart from the individual's own assets.

The tax advantages of using life insurance for charitable giving are significant:

• The death benefit paid to the charity is generally tax-free.
• If the policy is donated during the policyholder's lifetime, they may be eligible for a tax deduction.
• The policy is removed from the donor's taxable estate, potentially reducing estate taxes.

Tom, a long-time supporter of his local animal shelter, explains his strategy: "I've always donated what I could to the shelter, but it never felt like enough. By making the shelter a beneficiary on my life insurance policy, I know I'll be able to make a significant impact even after I'm gone. It's a way to continue supporting a cause I'm passionate about and leave a lasting legacy."

Access to cash value

Permanent life insurance policies, such as whole life and universal life, accumulate cash value over time. This cash value component provides policyholders with a flexible financial resource that can be accessed during their lifetime.

Policyholders can access this cash value in several ways:

• Policy loans: Borrowing against the cash value at a typically lower interest rate than other types of loans.
• Withdrawals: Taking out a portion of the cash value, which may reduce the death benefit.
• Surrender: Cancelling the policy and receiving the accumulated cash value in whole, minus any fees.

According to LIMRA, 63% of consumers who own cash value life insurance cite "access to cash value" as a reason for purchasing the policy. This demonstrates the value that many policyholders place on this feature.

For example, Emma, an entrepreneur, shares how this helped her business: "When I needed capital to expand my business, I used the cash value of my life insurance policy as collateral for a loan. It was easier and faster than going through traditional lending channels, and it allowed me to seize a time-sensitive opportunity that significantly grew my business."'

Estate planning and wealth transfer

Life insurance plays a critical role in estate planning and wealth transfer strategies. While the Tax Policy Center estimates that only about 0.2% of estates are expected to owe estate tax in 2023, the impact on those who do can be significant⁶

Life insurance can be used in estate planning in several ways:

• Transferring Estate value without being subject to taxation: The proceeds of life insurance are typically passed to the beneficiary tax free, this can help policyholders avoid potentially costly estate taxes.
• Providing liquidity for estate taxes: The death benefit can provide the cash needed to pay estate taxes without forcing heirs to sell off assets.
• Equalizing Equalizing inheritances: When a significant asset like a business is being passed down to one heir, life insurance can be used to provide an equivalent inheritance to other heirs.
• Wealth replacement: When assets are donated to charity, life insurance can replace that wealth for heirs.

Many people worldwide are focused on minimizing taxes as part of their estate planning strategy. Life insurance can be effective in achieving this goal, as the death benefit is generally income-tax-free to beneficiaries.

As we've explored, life insurance offers a multitude of benefits that go far beyond the traditional death benefit. From providing peace of mind and covering final expenses to supplementing retirement income, funding education, ensuring business continuity, facilitating charitable giving, offering access to cash value, and aiding in estate planning, life insurance has evolved into a versatile financial tool.

These hidden benefits underscore the importance of considering life insurance as part of a comprehensive financial strategy. However, it's crucial to remember that the right life insurance strategy depends on individual circumstances, goals, and needs.

To fully understand and maximize the benefits of life insurance, it's advisable to consult with an InsureMe licensed insurance agent. They can help navigate the various options and design a policy that not only protects loved ones but also maximizes the benefits of the policy to your particular needs.

By leveraging these hidden benefits, you can make more informed decisions about your financial future and create a lasting legacy for generations to come.