Fidelity Life: Why Life Insurance is Important

When people are young and healthy, taking out a life insurance policy may seem unnecessary. But as people get older and take on more responsibility, the need to financially support others can grow substantially. And choosing the right life insurance policy for the policyholder and their loved ones can help to alleviate this burden. So for anyone debating whether or not to purchase a life insurance policy, here’s why life insurance is important and what makes it a critical piece of a solid financial strategy.
How does life insurance work?
Life insurance is a contract between a person (the policyholder) and an insurance company (the insurer). The contract says the policyholder will pay a monthly premium in exchange for a guaranteed death benefit. And if the policyholder passes away during the policy’s term, that death benefit will be paid to the beneficiaries.
Two common life insurance plans are term life and whole life:
Why is life insurance important?
Regardless of which type of life insurance policy someone has, there are several reasons why life insurance is important.
Replace lost income
For someone who is the primary breadwinner of the home, loss of life could result in devastating financial impacts for the remaining family. But a life insurance policy can provide support. Since the general recommendation for a life insurance policy death benefit is seven to 10 times the policyholder’s salary, the right plan could provide loved ones with almost a year’s worth of income. And that means less stress having to figure out how to move forward right away.
Help with debt repayment
Whether debt belongs to family members or was left behind by the deceased, life insurance can be used to take care of a lingering debt, like a business loan or mortgage. But the policyholder must buy a large enough policy to cover the outstanding debt to provide the best outcome for their family.
Provide a non-taxable legacy
Much of what people leave behind as part of their estate will be taxed by the government. But the payout from a life insurance policy is tax-free. That means beneficiaries will receive more money dollar for dollar than they may from other taxable accounts.
The bottom line
Life insurance is designed to provide financial protection for loved ones if the policyholder should pass while the policy is in effect. And finding the right plan can provide great peace of mind that their loved ones can replace lost income, repay debt, or receive a tax-free legacy. Knowing loved ones are cared for by the right insurance policy is an important step that can free up the policyholder to pursue other financial goals.
Source: Fidelity Life