What Is Life Insurance Used For?

1. End-of-Life Costs

Funerals can get expensive. In 2023, the median cost for a traditional funeral with a casket and burial was $8,300 (and $6,280 for cremation), according to the National Funeral Directors Association. One of the most common uses for life insurance is to help cover funeral or cremation costs; dying without a policy or adequate savings to cover these bills can leave your family in a financial lurch while they're also grieving.

Life insurance benefits can be used for a variety of other final costs, such as probate and estate settlement, medical bills that health insurance didn't cover and any other related unpaid debts or bills.

2. Financial Support for Your Dependents

If something were to happen to you unexpectedly and your family lost your income, would they be able to get by? The financial impact of your death could be devastating if you currently financially support (or plan to support) a spouse, children, aging parents or other relatives. If you are the sole or primary earner, and if you don't have much savings, it's even more important to plan ahead.

If you die with a policy in place, the predetermined death benefit goes directly to your named beneficiary or beneficiaries right away, and it's usually exempt from federal income taxes.

Your loved ones can use the death benefit for whatever costs they need to cover, such as:

• Everyday bills
• Child care or tuition
• Paying the mortgage (or even paying it off)
• Continuing to operate a family business
• Saving for weddings or college for family members

3. Debt Payoff

If you have joint or cosigned debts with your spouse, or if you live in a community property state, your spouse may be on the hook for certain debts if you die.

Life insurance proceeds can go toward paying off debts that didn't go away with your passing, from car loans to credit card bills, leaving your family with fewer financial burdens and more security.

4. Inheritance

If you want to leave an inheritance for your children or other relatives, the cost of monthly life insurance premiums could feel more manageable than socking away money in savings or investments. Plus, if you get a whole life policy, it's guaranteed to grow tax-deferred and can help your family with future financial goals.

When you name those loved ones as beneficiaries on your life insurance policy, they will receive the funds when you die. Since life insurance's death benefit is paid quickly and usually without federal taxes, it can be a simple way to ensure your family receives an inheritance—especially if you won't have other assets to pass on.

5. Charitable Contributions

Are you hoping to leave money for a charitable organization as part of your legacy? If you don't have a large lump sum of money that can be given away upon your passing, you can set up a life insurance policy with a charity as your policy's beneficiary.

Your monthly life insurance premiums space out the cost, and when you die, the organization will receive your death benefit as a donation.

6. Estate Taxes

If you leave behind a sizable estate, your family may be subject to death taxes or estate taxes at the federal and/or state level. In 2024, your family won't owe estate tax unless your estate is valued over $13.6 million.

If your estate does exceed that amount, your family can use your life insurance proceeds to cover some or all of their tax bill. This lets them avoid having to liquidate other assets or using a portion of their inheritance to cover the hefty tax bill.

Frequently Asked Questions

The Bottom Line

Life insurance is often underestimated and misunderstood. It can be used as a way to cover your funeral costs, but life insurance can also be used for numerous other purposes—from paying off your debts to building family wealth to even serving as retirement income.

The tricky part is that life insurance comes in many forms, with varying costs, benefits and downsides. Take time to research how much life insurance you need and which type of policy is best for your goals and purpose for it so you can maximize what you spend on the premiums.