Life insurance can serve many different purposes and
in my experience is largely misunderstood.
For starters, one obvious purpose is to provide a death benefit for one's family if
they pass away prematurely. This is typically done via term life insurance (anywhere between
10 and 20 years in length). Term does not build any cash value and eventually expires,
but is relatively affordable and helps provide peace of mind.
If someone's objective is to pass money to their family, tax efficiently1, no
matter when they pass away, then we would be looking at permanent coverage such as whole
life insurance (on one person's life, or a joint/"second-to-die" policy). As long as
premiums are paid on a whole life insurance policy, the policy is
guaranteed2 by New York Life Insurance Company to pay out someday, whether
that's in 5 or 50 years. This is often the best way to fund a special needs trust for
example, or pass money to children in general for wealth transfer planning.
Finally, life insurance can also act as a tax deferred cash value
accumulation. The same whole life insurance policies mentioned above builds cash
value which can be accessed generally tax-free (via policy loans and surrenders, as loans
against your policy accrue interest and decrease the death benefit and cash value by the
amount of the outstanding loan and interest).
