What Is the Purpose of Life Insurance?

A life insurance policy is a policy people take out with a life insurance company to provide a sum of money when they die. Life insurance policies are designed to achieve several aims. These include providing for one's final expenses such as funeral costs and serving as a financial cushion for one's family members in order to avoid financial hardship. Other purposes include serving as potential investment vehicles and helping with one's estate tax planning.

Final Expenses

Dying can lead to unexpected expenses. These can include the costs of a casket, the purchase of a funeral plot and cost of a rental hall to hold a wake. A life insurance policy can help cover most and possibly all of these costs.

Social Security and Pension Benefits Replacement

When you die you surviving relatives may cease being eligible for retirement benefits such as social security checks or pension benefits. A life insurance policy can pay enough money to your survivors to compensate for this loss of income.

Salary Replacement

The death of a young primary earner can create financial insecurity for a survivor especially if she has young children and would find it difficult to enter the workforce. Life insurance can provide a surviving parent with the ability to delay or avoid entrance into the workforce.

Investment Vehicles

Certain forms of life insurance may offer policy holders financial benefits even if they are still living. A policy holder purchase a whole life insurance policy and use the equity gained to borrow against in times of financial hardship.

Tax Benefits

Life insurance policies are generally considered non-taxable income. This means that any money paid out will not trigger state, local or federal taxes. Purchasing a life insurance policy can be part of one's essential estate planning.