What’s the Worst That Could Happen Without Life Insurance?

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Contributor, Benzinga
December 10, 2021

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No one likes to think about the possibility that their family might not be able to financially survive if they were to suddenly pass away. Unfortunately, by the time you realize that you need life insurance, it might be too late to get a policy due to age or health considerations. Thinking about life insurance when you’re young and healthy can help save you money in the long-term. But what’s the worst that could happen without life insurance?

Our guide will help you learn a little more about the benefits of maintaining a comprehensive life insurance policy. We’ll also introduce you to a few of our favorite life insurance providers. 

After Life Expenses

When you die and receive a death benefit, your beneficiaries can use the benefit in any way they see fit. Some of the most common uses of life insurance death benefits include:

  • Funeral expenses. The average funeral in the United States costs more than $7,000. Some funerals and burials may cost up to $15,000. Your beneficiaries can pay for your funeral or cremation costs using your death benefit.
  • Debt obligations. While your beneficiaries have no obligation to cover your personal debts after you pass on, shared debts (for example, mortgage payments that have both you and your spouse on them) can be covered using your death benefit.
  • Childcare and living expenses. If you were the primary breadwinner in your home, your loved ones may struggle to cover bills after you pass. Thankfully, your life insurance death benefit can help cover costs during the grieving period. 

There are no legal limitations on how your loved ones use your death benefit. 

Debt Collections

The good news is that your beneficiaries have the right to not pay any of your debts after you die. The bad news is that doesn’t mean they will not deal with issues and harassment from debt collectors.

The death benefit of your life insurance policy is legally the property of your beneficiaries to do with as they please. The beneficiary can’t be forced to pay the debt unless this debt is considered a “community” debt and the beneficiary is your spouse. The beneficiary may also need to pay the debt if it is in the name of or was cosigned by the beneficiary. Debt collectors may also be able to access your death benefit if you name your estate as the beneficiary, as your debts are technically in the name of your estate at the time of passing.

Nevertheless, there are ways that creditors and debt collectors can cause problems for your beneficiaries, whether it’s due to claims against probate property or liens against property. The best thing to do is avoid having anything get out of hand so that when you die you don’t leave your beneficiary with a major debt headache.    

Tax Implications

In some ways, life insurance can be considered a very beneficial investment for your money. Most people who receive a life insurance death benefit aren’t aware that the funds they receive are essentially tax-free. Your life insurance policy gives you a way to transfer your death benefit to your beneficiaries without them having to worry about it being taxed.

Life insurance not only guarantees that your loved ones will get the money, but also ensures that it will not be taxed. In addition, earnings that you obtain through the growth of the policy are not subject to an increase on your Social Security income if you have it.

If you choose to take cash from the value of your life insurance policy, it is not subject to taxes as long as it does not exceed the amount paid into your policy through the premiums. You have the option to take a partial surrender of the cash value or borrow against your cash value.  Both of these are considered tax-free circumstances.  

Long Term Projects Come to a Halt

Life insurance is one way you can prepare your family for any future expenses by filling in the gaps if a primary caretaker or breadwinner passes away and is no longer able to provide financially. 

Life insurance will come into play to be able to provide what cannot be provided anymore. Other dependents may also benefit from your life insurance if they qualify and require long-term care. For example, if you pass away before your child graduates college, your life insurance death benefit may be used to help cover tuition expenses.

Life insurance can also aid in the event that a business partner or owner passes away. The right life insurance policy can help cover business operating expenses for a limited time after you die, which can be a major benefit to both employees and anyone who owns the business with you. 

Life Insurance Benefits

There are 2 types of life insurance that you can invest in: term and whole life insurance. Each type of policy has its own benefits and limitations. No matter which type of policy you choose, you’ll enjoy the following benefits. 

Dependents won’t need to worry about paying bills

Life insurance will be able to provide for your dependents’ living costs and other expenses after you pass on. Beneficiaries can use the death benefits paid out by your life insurance to cover their housing costs, pay off debts or for childcare. This can take a huge burden off your beneficiaries’ shoulders, especially when they need to take time to grieve.  

Coverage of final expenses

The final expenses that come after your death could possibly be detrimental to your survivors’ financial situations. Having life insurance and getting a policy that specifically covers any funeral, burial or any other costs related to your death can be a major relief to your survivors and beneficiaries.

Coverage for chronic and terminal illnesses

Some life insurance policies allow you to access your benefits under certain circumstances. You can add certain riders to your policy which would enable you to pay for some expenses in the case you get diagnosed with a terminal or chronic illness or are told you will only have a short amount of time left to live. 

Supplement your retirement funds

Certain policies accumulate cash value in addition to your death benefit. If the cash value continues to build up, you could potentially use it for some large expenses while you are still alive and tap into it during your retirement. However, you should note that this is only possible for some policies and is not a replacement of an actual retirement fund.

Tax advantages for payouts

Life insurance payouts are not considered income and therefore are usually tax-free. This means beneficiaries usually don’t need to pay any tax on money they receive through your death benefit. 

When to Buy Life Insurance

The cost of life insurance increases with each passing year of your life. If you want to look into policies, it’s better to begin considering the type of life insurance you need sooner rather than later, as waiting will increase what you pay for your coverage.

If you are considering a life insurance policy that accumulates a cash value, you can get more interest out of your policy by applying early. In addition, the younger you are the lower the premiums you qualify are. 

With age comes more health complications, which can result in more expensive insurance or the possibility of not even qualifying at all anymore. Some people begin comparing life insurance options as young as their mid-20s, especially if they have children or dependants that will need financial support if their primary caregivers suddenly pass away.

Compare Life Insurance

Comparing life insurance options doesn’t need to be stressful. Consider starting your search with a few of our favorite life insurance providers using the table below.

  • securely through Wysh Life Insurance's website
    securely through Wysh Life Insurance's website
    Best For:
    Those Under 50 Years Old
    Rating:
    Read Review
  • securely through Ladder Life Insurance's website
    securely through Ladder Life Insurance's website
    Best For:
    Adjustable coverage
    Rating:
    Read Review

    Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.

  • Best For:
    Under Age 64
    Rating:
    Read Review

    Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.

  • securely through Fabric Life Insurance's website
    securely through Fabric Life Insurance's website
    Best For:
    Young families
    Rating:
    Read Review
  • securely through Bestow Life Insurance's website
    securely through Bestow Life Insurance's website
    Best For:
    Term life insurance
    Rating:
    Read Review

    *excludes New York

  • securely through Sproutt Life's website
    securely through Sproutt Life's website
    Best For:
    People with healthy lifestyles
    Rating:
    Read Review

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Thinking About Life Insurance Early

Like homeowner’s insurance, car insurance, health insurance or any other type of insurance coverage you can buy, it pays off to know and compare all of your options before you sign onto a policy. 

Be sure to leave yourself plenty of time to compare quotes from a variety of competing insurance providers. When you take your time comparing coverage options, you’re much less likely to overpay for your policy. 

Frequently Asked Questions

Q

Can you live without life insurance?

A

There is no law that says that you must carry a life insurance policy. However, investing in life insurance can help your family survive financially if you suddenly lose your life.

Q

Do you need life insurance after 65?

A

If you have a spouse or child that depends on your income, you may need life insurance after you retire. If you plan to retire with debt, a life insurance policy can also be beneficial to those included on the policy who share the debt.

Methodology

Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.