The benefits of life insurance: What you need to know

Life insurance can be a planful way to show your dedication to the people you care about—offering them protection and potential for a financial benefit.

Whether you currently have dependents (or may in the future), or you're passionate about leaving a legacy to the organizations and people you love, life insurance can help you reach your financial and life goals. Here's how.

For most families, the most essential function of life insurance is to replace lost income when you die—potentially up to 20 years or more. Beyond that need, the right coverage can provide further comfort for your family. The two primary types of life insurance coverage are term and permanent.

If you want to protect loved ones for a certain chapter of your life—like while your children are financially dependent on you—term life insurance can provide affordable coverage for a 10-, 20- or 30-year period.

If you don't want your life insurance to expire, then permanent life insurance options like whole life, universal and variable universal life insurance may better suit your goals.

The most common and simplest form of permanent life insurance is whole life insurance, which lasts your lifetime (as long as premiums are paid) and includes both a guaranteed death benefit and cash value component.

"When you think about your life insurance needs, it starts with self-reflection: Who depends on you? How long do you need to provide for your kids? But also, how do you want to make a difference? Life insurance can support these goals," says Todd Yeiter, director of advisor support Thrivent.

Consider these 8 key advantages of life insurance:

While both term life insurance and permanent life insurance offer protection through a guaranteed death benefit, permanent life insurance can also accumulate cash value that you can tap into while you're still living. "We have life insurance for the benefit of each other and our kids—protection is for the survivors," Yeiter explains.

Life insurance can help your loved ones maintain their standard of living and give time and space to process grief instead of getting tied up in financial implications. "Life insurance provides transition time to mourn. That matters." says Yeiter.

Life insurance gives your family the financial support to honor you in the way you'd want. "If something happens to my wife, I want to do something significant—possibly make a sizeable donation to a place or cause that is meaningful in her heart. It's not just about income replacement, it's about institutions important for our daughters and showing her legacy in a meaningful way," says Yeiter.

Whether you want to put your kids through school, pay off a mortgage, or cover other debt if something happens to you, term life insurance offers short-term coverage that's more economical than permanent life options.

For example, if you have minor children or adult children who still need your financial support, you may opt to choose a term insurance option to protect them for as long as they need that assistance.

Permanent life insurance options allow you to potentially grow your money through your cash value component. Some policies even include opportunities to earn annual dividends (though they aren't guaranteed).

• Whole life: Each year, the policy’s cash value is guaranteed to increase.
• Universal life insurance: Earns a guaranteed minimum interest rate annually.
• Variable universal life: Offers the opportunity for market-driven growth.
  

If you have a spouse you want to ensure is taken care of down the road, life insurance could help. Married couples can use life insurance to help replace income in retirement due to loss of Social Security or pension benefits when their spouse dies.

Life insurance can also help you care for special needs dependents. In particular, a survivorship life insurance contract's death benefit can be used to continue care for special needs dependents to:

• Help cover the costs of a replacement caregiver.
• Supplement income for a dependent to remain in a comfortable living situation.
  

Families that anticipate income and estate taxes or need help paying for funeral expenses can look forward to the federal income-tax-free benefit received when the death benefit is paid out.¹ Also, you may find that using life insurance as an asset to give to heirs can have more advantages like flexibility, options and guarantees.

Additionally, money within a life insurance policy is also one of the only financial items that won't increase taxes on your Social Security income.

Depending on your coverage, you can borrow against your cash value or even surrender your coverage for cash if you really need it.²

The cash value of life insurance can be used for things, such as:

• Providing a retirement income stream.
• Paying for a child’s education.
• Making a down payment on a home.
• A source of emergency funds.

Keep in mind that when you access the cash value of your life insurance contract, you’ll reduce your death benefit. You also may have to pay fees or taxes, so it's best to talk with your financial advisor before you take action.

Whole life insurance can offer some unique living benefits to business owners in addition to the death benefit. For example, an optional waiver of premium rider on whole life insurance contracts can pay premiums if you experience a qualifying disability.

This may best be explained through an example. Let’s say a Thrivent financial advisor served a client, Robert, who purchased a whole life insurance contract with key person coverage to protect his business if he died prematurely.

Unfortunately, several years after buying the life insurance contract, Robert became severely disabled. Thrivent paid the whole life insurance premiums due to that waiver of premium rider, which not only kept the policy in force, but helped build cash value.

When the business came into some financial difficulties, Robert was able to access the cash value of the whole life insurance policy through a loan to keep the business running. When he died, the loan was paid out from the death benefit with the remainder going to his family-run business.

Additionally, if Robert's business hadn't experienced difficulties, he could have structured his policy to provide tax-free income as a supplement to his business earnings should he need it. This way, he would have still had the protection from his policy while also personally benefiting from it.

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Life insurance: A conversation guide

From vacations to college dreams, creating life plans with loved ones is one of the many joys in life. But when it comes to more sensitive topics, like unexpected death, it can be tempting to avoid the topic. Self-reflection and a family conversation can help you prioritize what's most important to you.

See the guide

"Ask yourself: Who do I want to be present for? Who's important to me? When you consider these, life insurance can make a significant difference, and you can evaluate the connection between its price and its impact," says Yeiter.

Ready to talk with a financial advisor about your coverage options? Connect with an expert near you.