Though term life insurance is one of many types of life insurance policies available, it is popular because of it's flexibility, affordability and guaranteed payout.
What is Life Insurance?
Life insurance is a contract between an insured person and an insurance company where the insurance company will pay a lump sum to a beneficiary of the insured person in the event of his or her death. A life insurance policy can be structured to provide coverage for a set amount of time ( Term Life Insurance) or indefinitely ( Permanent Life Insurance).
A typical life insurance policy can come in a great number of shapes and sizes. If you're choosing a life insurance policy for the first time, it's important initially to decide which type of life insurance policy is ideal for your specific situation. Life insurance policies can generally be broken down into two categories - term and permanent.
Term life insurance, which is the most popular type of life insurance policy, provides coverage for a specific length of time which you choose, while permanent life insurance covers the insured for life. We find that term life insurance may be right for many people, but if you have questions about whether you should consider purchasing term or permanent life insurance, you can always contact one of our licensed agents for assistance on choosing the right type of life insurance policy for you and your family.
Why do I need life insurance?
Obtaining a life insurance policy that will assist your family in the event of your death, is a key part of estate planning. If there are people that rely on your earning capacity, obtaining a life insurance policy is an important consideration. If you have young children or children about to enter college, you may want to apply for a policy that will cover living expenses for your family until they are able to be financially self sufficient.
What is a Term Life Insurance Policy?
Term life insurance These types of life insurance policies provide both a fixed premium (the amount you'll pay) as well as a fixed death benefit (the amount we'd pay your family). Term life insurance is a popular option because it boasts benefits that are attractive to people of most ages and situations.
Benefits of Term Life Insurance:
- Affordability - Not only will you pay the same rate for the entire term, but you can also choose a coverage amount and term length to fit your budget. A term life insurance policy will be several times less expensive than a permanent life insurance policy.
- Low maintenance - Term life insurance allows you to "set it and forget it". As long as you pay your premiums, your policy continues throughout the designated time period.
- Guaranteed Payout - Your death benefit is fixed, meaning that beneficiaries receive the payout that you chose at the beginning of your term.
- More Options - You can choose the term policy with the time limit and coverage amount that is ideal for your current and future needs.
What is a Permanent Life Insurance Policy?
A permanent life insurance policy, which includes whole life insurance and universal life insurance, is designed to give you life-long protection. You may have heard of whole life insurance, which is a type of permanent life insurance, but there are additional types of permanent life insurance policies available that you can customize. Permanent life insurance policies are designed to cover you until your death. But, with any life insurance purchase, it's important to find life insurance coverage that fits your individual needs.
Benefits of Permanent Life Insurance:
- Cash Value - Permanent life insurance may have the option to build cash value. The cash value earned with permanent insurance is tax deferred. In other words, while the money remains in the policy, you won't pay federal income taxes on it.
- Flexible Death Benefit - The death benefit of a permanent life insurance policy is the amount of money that is paid out to your beneficiaries upon your death and is determined by the life insurance contract. With a permanent life insurance policy, you may have the flexibility to adjust the death benefit (within the plan limits) up or down - without having to buy a separate policy.
- Flexible Payments - As your financial needs change, you may find the flexible premium payments provided by some permanent life insurance policies to be a good option, allowing you to change the amount and frequency of your premiums. Because of its potential to build a cash-value over time, your premium payments may be increased, decreased, or even skipped depending on the policy's cash value.
Types Permanent Life Insurance:
- Whole Life Insurance - Whole Life Insurance is a permanent policy, which covers you for a lifetime with fixed premiums and guaranteed protection for your loved ones that lasts a lifetime. Additionally, with whole life insurance you earn guaranteed cash value, which you can use however you want.
- Universal Life Insurance - Universal life insurance is also a permanent policy where the insured is protected with a guaranteed death benefit. Funds that are in the universal life insurance policy's savings component, are invested to provide the policy holder with cash value.
Which Life Insurance Policy is Better for You, Term Life Insurance or Permanent Life Insurance?
Both types of policies are assessed by insurance companies in the same manner, with policy premiums based on your health, lifestyle, and medical history. The key differences between term life insurance and permanent life insurance are that a permanent life insurance policy allows you to borrow against your policy and will effectively last as long as your policy is in good standing. However, a permanent life insurance policy will cost several times that of a similarly structured term life insurance policy.
If you already have a term life insurance policy that is about to expire, you may be able to convert it to a permanent life insurance policy, which will not only assure that your loved ones receive benefits, but will also allow you to build a cash value that can be used for medical and living expenses as you grow older.
What Kinds of Life Insurance Can You Get At Work?
Often an employer will offer a free basic group life insurance policy to employees. The benefit paid out will typically be $25,000 to $50,000, or one year's salary. While this amount will likely cover medical and burial expenses in the event of your death, there may not be much left over for your family and loved ones. If you have loved ones that depend on your income, you may want to consider supplemental life insurance.
You may have the option to purchase supplemental life insurance along with your employer's group policy. Supplemental life insurance will increase the benefit paid out to your family - sometimes three or four times your annual salary. Purchasing through your employer's marketplace will generally be the least expensive way to obtain a life insurance policy.
What is Quality of Life Insurance?
Quality of Life Insurance is an insurance policy with a rider, or add-on, that allows you to use some or all of your life insurance benefits early in the event of an accident, illness, or other medical condition. With Quality of Life Insurance, your benefits can be used for things like adult daycare or modifications to your home (he use of accelerated death benefits is unrestricted). If you suffer from a debilitating illness or accident, this type of insurance will make it easier to carry on with day to day tasks. †
What Affects the Cost of Life Insurance?
When you apply for a life insurance policy, your health and lifestyle are taken into consideration to determine the cost of your insurance premium. By maintaining a healthy weight, avoiding cigarettes or other products containing nicotine, and controlling any existing medical conditions by following the advice of your doctor, you'll be able to apply for a life insurance policy with a low policy premium. If you are overweight, smoke cigarettes, or have existing medical conditions, it is still beneficial to apply for a life insurance policy. Once these negative factors are under control, you can request a reconsideration of the rating on your policy and potentially pay a lower premium.
What are the Tax Advantages of Life Insurance?
While the main tax advantage of life insurance is that the benefit paid is non-taxable, there are other benefits to both permanent and term life insurance. For example, a permanent life insurance policy has a cash value component that allows you to accrue savings without being subject to tax. You should consult your tax advisors for your specific situation.
- Tax-deferred growth - With a permanent life insurance policy, any interest or growth in the cash value of your policy is not taxed until it is withdrawn. When funds are withdrawn, the funds are taxed as normal income.
- Tax-free dividends - Some permanent life insurance policies pay dividends as if you were a shareholder in the insurance company. Dividends paid from your life insurance policy are tax-free.
Things to Consider When Choosing a Life Insurance Policy
Once you decide upon the type of life insurance, you'll need to consider for how long you'll need a policy to be in effect and the coverage amount that you'll need. Answering these questions begins by considering the following.
How Long Do I Need a Life Insurance Policy?
The length of your life insurance policy depends on how long you anticipate financially supporting your loved ones. Ask yourself these questions when thinking about how long you may need life insurance...
- Do I have a mortgage or other debt?
If you have debt, the length of time it will take you to pay it off can be a helpful indicator in the term length of your policy.
- Who depends on me?
If you know how long you'll be depended on for financial support from a spouse or children, it can help you identify the length of time you'll need a term policy.
- What can I afford?
The dollar amount of life insurance coverage you need can affect your term length. If you need a high amount of coverage, you may want to consider a shorter term length to fit your budget.
How Much Life Insurance Coverage Do I Need?
Some experts will tell you that the answer is between 7 and 10 times your salary, but it can vary tremendously based on your individual needs. Ask yourself these questions when considering how much life insurance do I need...
- How large are my debts?
If you have a mortgage, student loans, business loans or any other debts, a good beginning can be to calculate the total amount of your outstanding debts.
- What life events do I want secured for my family?
You may want your death benefit to assist in childcare or college tuition for your children. Perhaps you want to provide supplemental retirement for your spouse in addition to your funeral expenses. Once you've considered what you'd want your death benefit to help cover financially for your family, try to calculate the total amount of money it would cost to do so.
How Often Should I Review My Life Insurance Needs?
Typically, you should review your life insurance policy and coverage at least once a year. Additionally, if you go through a major life change such as marriage or divorce, the birth or adoption of a child or grandchild, a new home purchase, or if you or your spouse experience significant changes in your health, you should review and update your life insurance policy.
The answers to these questions may not seem clear immediately, but with a little consideration ahead of time and some guidance from one of our licensed agents, you'll be able to make an informed decision on the type of policy for life insurance that is right for you. You can also use our life insurance calculator to find out how much life insurance you need.
This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. For advice concerning your individual circumstances, consult an attorney, financial/tax advisor or accountant.
† Important Consumer Disclosures Regarding Accelerated Benefit Riders
An Accelerated Death Benefit Rider (ABR) is not a replacement for Long Term Care Insurance (LTCI). It is a life insurance benefit that gives you the option to accelerate some of the death benefit in the event the insured meets the criteria for a qualifying event described in the policy. The rider does not provide long-term care insurance subject to California insurance law, is not a California Partnership for Long-Term Care program policy. The policy is not a Medicare supplement.
ABRs and LTCI provide different types of benefits. An ABR allows the insured to access a portion of the life insurance policy’s death benefit while living. ABR payments are unrestricted and may be used for any purpose. LTCI provides reimbursement for necessary care received due to the inability to perform activities of daily living or cognitive impairment. LTCI coverage may include reimbursement for the cost of a nursing home, assisted living, home health care, homemaker services, adult day care, hospice services or respite care for the primary caretaker and the benefits may be conditioned on certain requirements or meeting an elimination period or limited by type of service, the number of days or a maximum dollar limit. Some ABRs and all LTCI are conditioned upon the insured not being able to perform two or more of the activities of daily living or being cognitively impaired.
This ABR pays proceeds that are intended to qualify for favorable tax treatment under section 101(g) of the Internal Revenue Code. The federal, state, or local tax consequences resulting from payment of an ABR will depend on the specific facts and circumstances, and consequently advice and guidance should be obtained from a personal tax advisor prior to the receipt of any payments. ABR payments may affect eligibility for, or amounts of, Medicaid or other benefits provided by federal, state, or local government. Death benefits and policy values, such as cash values, premium payments and cost of insurance charges if applicable, will be reduced if an ABR payment is made. ABR payments may be limited by the contract or by outstanding policy loans.