What Does a Life Insurance Policy Pay For?

iQuanti: It's often recommended that we get an adequate amount of life insurance coverage. However, what exactly does this policy pay for exactly? In this post, we'll explain what life insurance is and what the policy can be used to do.

What is Life Insurance?

Life insurance is a contract between you and an insurance company to pay a death benefit to your beneficiaries if you pass away. Simply put, it's a way to cover the expenses incurred and financial losses if you are no longer living and can provide for your family.

What Does Life Insurance Pay For?

Technically there are no restrictions on how your loved ones can use the death benefit from your life insurance policy. The following are a few of the most common uses.

Final Expenses

Final expenses might be anything associated with the death of the policyholder. These might be such costs as:

• The burial or funeral 
• Embalming
• The casket
• A reception

The policy benefits might also be used to pay for such expenses as any outstanding medical costs or other estate settlements.

Income Replacement

For most families, a life insurance policy is buying income replacement. If a working spouse is unfortunately no longer with us, the surviving family members will use these proceeds to pay for everyday expenses like food, shelter, daycare expenses, etc.

Major Debts

Most American households carry some kind of debt. Therefore, when a life insurance claim is paid out, it can be a smart use of the money to pay these debts off.

For example, a mortgage is typically the most significant expense that most families have. Using the death benefits to pay it off can provide some significant relief to their monthly budget. 

Future Costs

When a parent passes away, not only will it have an immediate financial effect on the family, but it can also impact their potential to pay for major expenses in the future, such as college tuition or a wedding. A life insurance policy could provide your family with proceeds that they could tuck away for these future purchases.

Inheritance 

Even if your family is all grown up and you're now retired, an insurance policy can still be utilized to create a financial legacy that could be handed down to future generations.

A Policy Could Also Be Your Lender

Though most people tend to focus on the death benefit that life insurance provides, the truth is that it can also be used while you're living as your own personal bank.

If you opt to get a permanent life insurance policy (such as whole life or variable universal life), these contracts have a cash value component that grows tax-deferred. Once the cash value is substantial enough, you may be able to borrow against it tax-free and use the money in other ways, such as paying off high-interest debt, buying an income property, or paying for your children's tuition. 

The Bottom Line

While a life insurance policy can be used to pay for the insured's final expenses, it can also help the loved ones you've left behind, serving as a source of income replacement and debt repayment. The benefits can also be used for future costs or even serve as an inheritance for future generations. If you have a permanent policy, consider how this contract may also double as your private bank, providing collateral you can borrow against tax-free.

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