Knowing loved ones will be financially secure after you’re gone can be a great comfort, and it’s a top priority for many. In a recent NerdWallet study, leaving an inheritance was the most selected reason to buy life insurance among millennials (ages 26-41).
When you buy a life insurance policy, you choose the amount of coverage you want. In most cases, the face value of your life insurance is the sum of money your beneficiaries receive if you die. This payout is known as the “death benefit.” Your life insurance beneficiaries can often choose to receive the payout as a lump sum or in installments.
You can have more than one life insurance policy, but insurers generally place limits on how much coverage you can buy. This limit is typically 20 to 30 times your annual income.
If you want a long-term policy that may last your entire life, consider permanent coverage such as whole life insurance. If you need temporary coverage while you build up wealth, consider term life insurance. There are pros and cons to both approaches. Term life is considerably cheaper than permanent life, but if you outlive the policy, your beneficiaries won’t receive a payout. Permanent policies typically last your entire life, but larger policies can be pricey.
The payout goes directly to your beneficiaries. In general, the person or entity you list as the policy’s beneficiary receives the death benefit, not your estate. This means the funds don’t have to go through probate or pay off any outstanding debts before reaching your beneficiaries. Even if the payout goes directly to a beneficiary, the funds are still considered part of your estate for tax purposes if you own the policy.
The death benefit is tax-free. Beneficiaries may have to pay tax on any interest earned on the principal amount. This typically occurs when the beneficiary receives the payout in installments. If you live in a state that levies inheritance tax, your heirs may be required to pay tax on the money they inherit from your estate. However, a life insurance policy is typically considered separate from your estate and not subject to this tax.
Your beneficiaries can use the payout for any purpose. Life insurance is a way to leave cash without strings attached. That is, your beneficiaries can use the money for any purpose. In general, insurers won’t issue a life insurance payout to minors. So if you’re leaving an inheritance for young children, you may want to consider setting up a life insurance trust and naming the trust as the beneficiary.
Life insurance rates are based on your health and age, so if you’re older or have a pre-existing condition, the cost of coverage may not be in your budget. Leaving an inheritance isn’t the only motivation for getting life insurance. Still not sure if you want to get life insurance to leave an inheritance? Use our tool below.
In conclusion, life insurance can be a valuable tool for ensuring your loved ones are financially secure after you’re gone. By understanding how life insurance payouts work, the different types of policies available, and the benefits of using life insurance as an inheritance, you can make an informed decision about the best way to provide for your family’s future. Remember to consider your unique financial situation and consult with a financial advisor to determine the most suitable life insurance policy for your needs.