By better understanding life insurance and how it works, you may discover that it can help provide financial protection for you and your loved ones. And it can do so in more ways than you might realize.

Each of life’s major milestones — getting married, having children, starting a business and caring for aging family members — comes with significant responsibilities, many of them financial in nature. That’s why if your loved ones already depend heavily upon you and your income, then it might be time to consider buying life insurance.

Simply put, life insurance helps provide financial support to your loved ones after your death. It can protect them from life’s uncertainties and unseen complications while also potentially giving everyone more peace of mind.

But what can life insurance actually do, in practical terms? As it happens, there are several ways it can help your designated beneficiaries.

5 important things life insurance can do

1. Replace your income.

Sudden income loss can bring significant hardship to a grieving family, whether your household relies upon you as the sole wage earner, or you’re providing one of two incomes needed to maintain your lifestyle. For parents with young children or teenagers heading off to college, it’s easy to see a policy’s potential value. But did you know that it can also be used to help cover the needs of a disabled adult child, ailing sibling, aging parent or cherished spouse?

2. Pay for end-of-life costs.

Depending upon choices made, funeral costs (e.g., burial, cremation, casket, vault, cemetery fees) can run up a hefty bill, potentially depleting funds that might otherwise go to paying a mortgage, medical fees, college tuition and so forth. With a policy in place, however, payouts are typically made to beneficiaries shortly after the carrier reviews and processes the claim.

3. Protect your business or other major, shared financial obligations. 

Did you know that a life insurance policy’s death benefit might be used to cover your small business’ payroll and other operational expenses should your death disrupt operations? So, whether you are a sole business owner, a co-owner of a family business, or have one or more partners, your life insurance policy can be a critical part of your company’s long-range business plans.

Similarly, if you share a significant joint financial obligation — say, a personal loan with an adult child or sibling — then your life insurance policy could be used to help them meet those needs, too.

4. Cover estate taxes.

If you anticipate leaving substantial assets to your heirs, they might face a large estate tax burden. Beneficiaries of your life insurance policy could choose to put the death benefits they receive — which are not taxable in most instances — toward paying those taxes. It's possible that interest earned on money received through such a policy may be taxable and should be reported to the IRS.

5. Provide an inheritance or support a beloved charity.

If you want to leave your loved ones a financial legacy, but haven’t yet had time to grow a sizable bequest, a life insurance policy can be an affordable solution. Alternatively, if you’re passionate about a social cause, you can designate a favorite nonprofit or charitable organization as your policy’s beneficiary.

The role of group life insurance plans

Of course, when it comes to buying a life insurance policy, many people choose to rely solely on one provided by an employer. Known as “group life insurance plans,” they typically cover only one or two times your base salary and may be paid through payroll deductions. Some companies will provide a basic plan at no cost to employees.

While it’s wise to take advantage of such options, if available, it’s also smart to work with an experienced financial advisor to assess your family’s unique needs. In many instances, purchasing additional life insurance coverage may be warranted.

The takeaway

Yes, there is a cost to life insurance. Typically, your premiums are determined by your health, family health history and your age. But there are many good reasons to carry life insurance. Ultimately, the main rationale is the same: to leave a legacy that accurately reflects you, your values and your intentions.

Through a conversation with your financial advisor, you can assess whether life insurance might be a good addition to your comprehensive financial plan.