10 Surprising Benefits of Life Insurance You Never Knew About

The main purpose of life insurance is to provide financial support to your loved ones after your death. After you pass away, the beneficiary is usually paid a set amount which is called by many names including lump sum, payout, death benefit, or sum insured. But whatever you call it, the money can take care of many expenses at the end of life including funeral planning and paying off debts while settling someone’s financial affairs.

However, there are other less well-known benefits to life insurance. Here are 10 we discovered.

1. Life Insurance Payouts Often Tax-Free

A life insurance policy’s death benefit is generally not taxable, so your loved ones should not be burdened by tax problems after receiving the payout. There are exceptions, however. Most often, these exceptions will be tied to money gained by interest on the account. Check with a tax professional and research your options before withdrawing funds.

According to Investopedia, permanent life insurance can also help you manage your own tax burden. It can build cash value which grows tax-deferred, so you won’t owe tax as long as the money stays in your policy. It can be especially useful to those who have already paid the maximum into retirement accounts like 401Ks.

2. Customize Your Policy With a Life Insurance Rider

A rider is an addition you can make to a life insurance policy to accommodate other life events. Some examples of riders include:

• Accelerated Death If you are diagnosed with a terminal illness, this rider can help you get all or part of the money paid out before death.
• Long-term Care A long-term care rider can cover the cost of a nursing home or similar support.
• Disability Income If you become disabled, a disability income rider could give you a monthly stipend.

There are also riders that let you transition a term life insurance policy (term insurance is a policy that is for a set period of time) into permanent life insurance and there are riders that let you stop paying premiums if you become disabled.

3. Make Charitable Donations With Your Policy

A life insurance policy can fund a charitable contribution. There are several ways to do this including making the charity your beneficiary or donating the policy itself. Again, you’ll want to check with a tax or financial consultant to choose the plan that works for you. No matter which method you choose, you’ll be able to provide a lasting legacy for a cause you believe in, explains Investopedia.

4. Borrow From Your Life Insurance to Fund a Loan

Life insurance policy loans are not like other loans, according to Forbes, because they do not need to be paid back. That’s because you are essentially borrowing your own money. However, if you do not pay back your loan, the benefit when you die will be reduced and your beneficiary will receive less money. You’ll want to look into the fine print if you are interested in taking money out of your life insurance policy. Borrowing can only take place where there is a cash value, so this only happens with permanent, cash-value life insurance, not term life insurance which has no value.

5. Use Life Insurance as a Hedge Against a Bear Market

According to U.S. News & World Report, another surprising benefit of life insurance is the ability to take funds out to “safeguard against a sagging stock market.” Instead of having to sell stocks and take a loss, retirees can borrow money from a permanent life insurance account and when the market rebounds, can pay back the loan.

6. Pay for College Expenses With Life Insurance 

There are several advantages in using a permanent life insurance policy to pay for college. According to Bankrate.com, those advantages include flexibility, easy access to funds, and the funds may not affect financial aid. But there are also drawbacks, so be sure to compare the pros and cons with alternatives, such as using a 529 college savings account.

7. Cover Funeral Costs Using a Life Insurance Policy

With the median cost of a funeral nearing $8,000, setting aside money for funeral costs is one of the benefits of a life insurance policy. There are also special types of policies that specifically are available to cover funeral expenses.

8. Create an Alternative to Traditional Saving Strategies

For those who have had a difficult time-saving money, a life insurance policy will guarantee a set amount of money to a beneficiary, according to NerdWallet. So if your savings are meager, life insurance is an alternative strategy.

9. Supplement Your Retirement Income

While permanent life insurance offers the option of borrowing from your policy, term life insurance is less expensive, so some financial advisors suggest purchasing a term life insurance policy and investing the rest in other types of investments like a Roth IRA, as outlined in this Schwab post. 

However, for high-income individuals, there are some benefits to using a permanent life insurance policy in retirement. For example, there is no limit on how much can be added to a Life Insurance Retirement Plan or LIRP, according to Success.com.

10. Sell Your Life Insurance Policy for Cash 

According to Zebra.com, one of the most underutilized and least understood benefit of owning an insurance policy is being able to sell it to a third party, called a “life settlement.” You can receive a lump sum cash payment that will be higher than the surrender value but less than the policy’s death benefit. The ability to sell the policy is one of several things you can do while still alive.

If you are considering buying a life insurance policy, be sure to talk with your agent about the pros and cons of these ten benefits and work with them to decide if you’d like a permanent policy or a term one. If you already have a policy, you’ll also want to talk with your financial advisor and insurance agent to determine if you want to take advantage of any of these benefits.

Whether you exploit these benefits or not, the biggest gift of all will be the peace of mind having life insurance will give you knowing that there’s a plan to take care of your family and your own finances and debts when you are gone.

If you still have questions about how to save on life insurance, take a look at our article: Life Insurance Hacks: 7 Tips to Save Big and Still Get Maximum Coverage.