A Guide to Life Insurance Beyond the Death Benefit

When you hear the words “life insurance,” chances are you only think of one thing: the death benefit. After all, ensuring loved ones can get financial support after an unexpected death is the main reason anyone gets life insurance. However, that doesn’t mean this is the only potential benefit. There are many other reasons you might want to invest in this type of policy.

Estate Management

There are many tricks you can use to make it easier for your loved ones to make the most of the estate you leave behind. For example, you can avoid your death benefit being taxed as part of your estate by transferring ownership of the policy to the beneficiary. This is usually done in cases where there is no surviving spouse since assets passed to a surviving spouse are exempt from the estate tax. When the policy is owned by a surviving beneficiary instead of the deceased, not only is the death benefit not taxed, but the estate tax itself may be significantly lower.

Another option is using an Irrevocable Life Insurance Trust. According to Investopedia, this achieves the same goal of bypassing estate tax for the death benefit, but it also has other benefits. Since your assets belong to the trust, an ILIT can give you a sense of security if you do not want your beneficiary to have full control of the assets (for instance, if they are irresponsible, unreliable, or likely to undergo litigation).

Life Insurance for the Living

What many people don’t realize is that life insurance can be an invaluable financial tool while you are still alive. Many permanent life insurance policies allow you to accumulate a cash value that you can then use for things like college fees, retirement income, or medical expenses. In the case of variable and premium life insurance, you can sometimes use the cash value to cover the high premiums themselves.

You can either withdraw the cash or borrow it. According to NerdWallet, borrowing against your life insurance policy can be a way of generating liquidity for yourself. Any interest paid goes back to you — in short, no money is paid to an external creditor. If you need a large lump of cash and don’t need the death benefit, you can also surrender your life insurance entirely. You get the full cash value, minus any surrender charges. These tend to only apply to the first 10 to 15 years of the policy and usually decrease over time.

Applying for Life Insurance

When applying for life insurance, you will be asked to do a blood test to assess your overall health. In particular, testers will look for warning signs like high blood pressure, cholesterol, and glucose, as well as the consumption of tobacco and drugs. The healthier you are, the lower your premiums. Sure, blood tests aren’t fun, but they are nothing to worry about.

Generally speaking, these tests will give an accurate representation of your health. That said, there are ways they will fluctuate on a daily basis. Therefore, mistakes to avoid in the lead up to the test include drinking too much coffee, eating when you have been told to fast, eating too much salt, smoking, or having too much alcohol the night before.

Smokers should bear in mind that many insurance companies do not differentiate between occasional, regular, and heavy use. Of course, a heavy smoker will tend to be less healthy and incur higher premiums, but if you have consumed a tobacco product in the past year, you are usually considered a smoker for insurance purposes.

If you have trouble qualifying for an affordable life insurance policy, you still have options that can help your family in case you pass unexpectedly. One option is to purchase final expense insurance which has an easier application and qualifying process. This insurance will cover funeral costs (funerals can cost up to $15,000), and you can also use the benefit to cover medical costs or credit card debt.

Life insurance isn’t just something you should get to support your loved ones. When used wisely, it can act as a type of personal bank during your lifetime and protect your assets once you’re gone. Just make sure to be smart when applying for your policy, and to start the process as soon as possible — the healthier and younger you are when you start, the more valuable your policy will be over time.

Post contributed by: Jim McKinley of http://moneywithjim.org/