Not everyone needs life insurance. You can determine if it is necessary by asking yourself whether anyone depends on you for financial support or if there are any debts that you have to share. You probably need to buy life insurance if you answered yes to any of the questions above.
Take a closer look at life insurance. Find out what it’s all about, how it functions, and how much coverage you require.
In the unfortunate event of your passing, life insurance provides crucial financial protection for your family. It ensures that your loved ones can maintain their financial stability after you are gone. A recent study by the Life Insurance and Market Research Association found that over 50% of Americans lack individual life insurance policies, and 30% do not have any form of life insurance at all.
What is life insurance?
A life insurance policy provides a specified sum of money upon the death of the insured. The benefits are disbursed to the beneficiary or beneficiaries designated in the policy.
What is the amount of life insurance you require?
Identify who, if any, depends on your financial security:
- Are you married? Is your spouse earning a separate income?
- Have you got any kids? How old are your children? When do you expect them to become financially independent?
You should also consider your own financial position:
- What is your total debt? How much debt do you have?
- What is your monthly spending?
- What is your monthly savings? Do you include retirement savings?
Calculate Term life insurance is a good option if you want to:
- How much income would your family need to replace, if you were no longer around to pay for the bills
- The length of time you would like the insurance to pay for expenses such as your mortgage or college tuitions for your children
When you consider whole life or universal insurance, it is important to also determine how much money you need to cover:
- Pay funeral expenses and medical bills
- Provide for a special needs child
- Cover estate taxes
You will have to take into account inflation when choosing a policy. The amount of protection you need may also change over time. You may need less coverage because you have almost paid off your home, even though the price of cars is increasing due to inflation.
THERE ARE THREE BASIC TYPES OF LIFE INSURANCE:
- Term life insurance
- Whole life insurance
- Universal life insurance
You decide how you want to purchase your life insurance. According to the Bureau of Labor and Statistics, 60% of US companies offer full-time workers life insurance. Most employers who offer life insurance offer a benefit that is equal to your annual salary. It may not cover your family members.
Purchase individual and dependent life insurance.
Examine each life insurance type separately.
Term life insurance
Term life insurance is the most popular and cost-effective option, making it straightforward to understand. It provides individual coverage for a specific number of years, typically in terms of 10, 20, or 30 years. If you pass away during the policy term, your beneficiary will receive the full death benefit.
For instance, you might buy a term insurance policy worth $1,000,000 that lasts for 20 years. If you die in the 17th year, your beneficiary would receive $1 million. However, if you pass away after the 20-year period, the policy expires with no payout.
There are three main types of life insurance policies:
- A level term insurance policy offers a fixed premium along with a set death benefit. This means the same benefit is paid regardless of when you pass away during the term. For example, if you have a level term policy for 20 years that pays $1 million, your beneficiaries will receive that amount whether you die in the first year or the 19th. The premium remains the same each year.
- Annual renewable term insurance allows you to pay a single premium per year. You can renew the policy even if you don’t have proof of insurance. The best option for those who need short-term coverage is Annual Renewable Term Life Insurance, or Yearly Renewable Term.
- The death benefit of decreasing term insurance decreases with time. As the death benefit decreases over time, decreasing term insurance offers rates that are lower than those of other term insurance types.
No matter which term-life policy you choose, benefits will be paid at your death.
What is the cost of term life insurance?
The most affordable choice is term insurance, as it provides coverage for a limited duration. Premiums are influenced by the death benefit amount and the policy’s length. Insurance providers will evaluate factors such as your age, gender, health status, and anticipated lifespan.
As long as you pay your premiums on time, the policy will stay active until its expiration date.
What happens when the school term ends?
If you outlive the policy term, you will have several options to consider:
- You can renew the policy for an additional specified period.
- You may convert it into a whole life insurance policy.
- You have the option to cancel the policy at any time.
Group term life insurance
As previously noted, 60% of employers offer life insurance to their full-time employees (source: Bureau of Labor Statistics). This coverage is typically provided as a term policy.
You will remain covered as long as your employer pays the premiums and you are employed there. The benefit can either be a fixed dollar amount (e.g., $10,000) or a multiple of your base salary (e.g., 2x). It is generally a guaranteed issue policy, meaning you cannot be denied coverage due to health issues.
If you leave your job, you may have the option to switch to an individual policy. In most cases, you won’t need to provide proof of health, although your premiums may be higher.
Voluntary group supplemental term life insurance
Your employer may offer supplemental life insurance that adds to the group coverage. This insurance is fully funded by you and is typically available in multiples of your annual salary or in fixed amounts like $5,000 or $10,000.
A certain level of coverage is usually available as a guaranteed issue, meaning you can purchase it without providing health proof. However, if you wish to buy a higher amount, you will need to provide evidence of insurability.
Taxes for term life insurance
When you purchase an individual term insurance policy, you pay premiums with after-tax dollars. As a result, your beneficiaries typically will not owe taxes on the death benefits they receive. The same tax treatment applies to life insurance provided by your employer.
However, the value of group life insurance and any additional coverage may be counted as part of your taxable income. If your coverage is less than $50,000, you are unlikely to face tax liabilities. If it exceeds this amount, the IRS will establish a fair market value for your insurance. You may be taxed on any difference between this value and what you paid.
For group term and supplemental life insurance from your employer that totals less than $50,000, there is no income tax liability. For coverage exceeding $50,000, the IRS assigns a fair market value. If your premiums are below this fair market value, you will owe taxes on the difference. For further information on calculating fair market value, please visit the IRS website.
Whole life insurance
Permanent or whole life insurance provides a guaranteed death benefit that lasts for your entire lifetime, with the payout available up until a specified age limit.
Unlike term insurance, whole life insurance accumulates cash value over the life of the policy. A portion of your premium generates a guaranteed minimum return, and this cash value grows on a tax-deferred basis. You will only incur taxes on the cash value when you withdraw funds.
Some policies may also pay dividends, which can be taken as cash or reinvested back into the policy. This can help cover premiums, repay loans, or even increase the death benefit.
What is the cost of whole life insurance?
Whole life insurance tends to be more expensive than term insurance due to its cash value component. The premium amount is influenced by factors such as the death benefit, your age, gender, health status, and expected lifespan. As long as you pay your premiums on time, the policy will remain active. Additionally, the premium you pay stays consistent throughout the life of the policy.
Can You Borrow Against Your Whole Life Insurance Policy?
Yes, a whole life insurance policy allows you to borrow against its cash value. Some policies may permit withdrawals without restrictions, requiring you only to repay the interest on the loan. However, if you do not repay the loan, any outstanding amount will reduce the final payout of your policy.
Taxes on Whole Life Insurance
Typically, benefits from whole life insurance are not taxable for the beneficiary. However, there are certain circumstances in which the beneficiary may be liable for taxes on the benefits. You could face tax implications if:
- If you choose to withdraw the money from your policy before the end of the term, you could be subjected to tax on any amount above the premiums you paid.
- If you receive dividends that exceed what you paid for premium, the tax may apply.
- If you fail to repay a loan the outstanding amount could be considered as a tax gain.
Visit the IRS site if you want to know more about how life insurance policies are taxed.
Universal Life Insurance
Universal life insurance is a hybrid policy that combines both term life and whole life. The hybrid policy allows you to accumulate savings, but also gives the option to earn cash on your policy. Universal life is sometimes referred to as a savings plan with an attached life insurance policy.
Policy flexibility
- If you choose, you can deposit more money than the initial premium to increase your savings.
- With a universal policy, you decide the best way to save and earn.
- The premiums and administrative expenses can be paid using the investment income.
- Your death benefit can be increased by adding earnings.
- The cash value can be used to borrow against.
- Savings can be withdrawn at any point to cover larger costs, such as a deposit on a house or tuition for college.
In the end, the money in your account must be sufficient to cover the premium.
Indexed universal life insurance
Your universal life’s value depends on stock market stability. If the stock market is performing well, then your account will reflect this. Your policy’s value may also drop if the stock market plummets. It is normal to expect fluctuations.
You may therefore want to look into indexed universal insurance. This type of insurance can offer safer investments and be considered to be less risky.
Taxes for universal life insurance
Benefits from universal life insurance are usually not taxable for the beneficiary. There are certain instances in which the beneficiary may have to pay tax. You can, for example:
- You may have to pay tax on any amount you receive in excess of what you paid for the premium if you withdraw the cash value early.
- Dividends may be subject to tax if the total exceeds what you paid for premium.
- Any amount that is not repaid may be considered as a tax gain.
Visit the IRS site if you want to know more about how life insurance policies are taxed.
Dependent life insurance
Your spouse, domestic partners and children are covered by dependent life insurance. The amount of coverage for your spouse is usually available as dollar increments between $5,000 and $10,000, while the children’s insurance amounts are fixed. These supplemental policies are designated to you automatically.
Individual life insurance policy rider
Your insurance provider may provide a dependent insurance rider if you have an existing individual policy. You can purchase coverage for just your spouse or just your children.
Your spouse’s premiums will be more expensive than your child’s. You may be asked to provide proof of insurance by some insurers. This usually involves completing a questionnaire about your family’s general health so that they can assess any potential medical risks.
Supplemental group life insurance
When you buy dependent insurance through your employer’s plan, the spouse will usually be covered for 50-100%. The amount of coverage for children is usually a set dollar value. The premiums you pay for your spouse depend on both the value of the insurance policy and the age of your spouse. It may be necessary to show proof of your good health. All your children will be covered by the same premium.
Taxes imposed on life insurance for dependents
If you pay for the entire premium, dependent life benefits will not be considered income. If you pay the full premiums, the dependent benefits are not taxable if the value of the benefit is less than a specified amount. Visit the IRS Website for more information.
Proof of Insurability
Before issuing an insurance policy, some insurers require proof of health or insurability. It may be necessary if you:
- A policy that offers a large death benefit
- If your medical or family history shows that you are at high risk, then it is important to take action.
- You plan to travel or frequently travel in areas of the globe deemed dangerous
- Participate in hazardous hobbies like skydiving or racecar driving.
- Other high-risk factors, such as poor driving records
Before agreeing to offer you an insurance policy, the company will want to know your current physical state. The insurance company may ask for medical records, or they might send an employee to do a health checkup in person. The tests will measure your blood pressure, cholesterol, blood glucose, and thyroid function.
Insurance companies may review other information, such as your criminal history and credit report (if you are a small business owner).
Once your proof of insurance is accepted, coverage will begin.
Beneficiaries
When purchasing life insurance, it is important to choose a beneficiary. It is important to designate the beneficiary or beneficiaries who will be receiving the benefits in case of your demise.
If you choose multiple beneficiaries, the death benefit can be divided among them. You will have to decide the amount of death benefits that each beneficiary will get if you designate more than one. You can choose not to name beneficiaries, and the death benefit will be divided evenly between all of them.
A secondary beneficiary or contingent beneficiary will need to be designated. It is the individual(s) who will be entitled to receive your benefit in case of death. If you have more than one contingent beneficiaries, it is necessary to calculate the amount of death benefits each beneficiary will receive. The benefit will be divided evenly between the beneficiaries if you don’t.
Please provide all the information you can about your beneficiaries. Typically, names, addresses and Social Security numbers will be required. The administrator can easily locate individuals by using this information.
Exclusions and limitations
In some cases, life insurance policies do not pay out. Check your insurance policy to see if there are any exclusions.
- Act of War or war
- Self-inflicted injuries or suicide, including the voluntary use of poisons, chemicals compounds or drugs, unless prescribed by a doctor
A number of policies also exclude aviation. The exclusion is not applicable to air travel on commercial airlines, but only for those who are killed in private aircraft.
Some policies restrict coverage for dangerous activities such as hang gliding or rock climbing. You may still be covered if you pay a premium if you participate in dangerous activities such as auto racing, rock climbing or hang gliding.
Modifications and riders
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- Access to early death benefits for terminally-ill patients
- Accidental death benefits (also called double indemnity)
- Coverage for dependents
A disability rider may be included in your policy. You won’t have to pay a premium in the event that you are totally disabled.
What type of insurance policy is best for me?
There is no one-size-fits all solution to the question of how best to protect your family against a loss of income. Review the options.
Term Life Insurance
Term life insurance allows you to secure low rates if you purchase individual coverage while you’re young and healthy. In many cases, it can even be more affordable than employer-provided coverage. If you are not in good health or find individual insurance difficult to afford, group coverage may be a better option for you.
Whole Life Insurance
Whole life insurance is an excellent choice if you want to leave a lasting legacy for your loved ones. This type of policy offers a substantial death benefit and also builds cash value over time.
Universal life insurance
Universal life insurance, like whole-life coverage, allows you to accumulate additional cash values with your policy. You can also choose flexible payment options for premiums, loans on your policy and savings over the long term. If you’re buying this policy late in your life, you may want to reconsider.
Accidental Death & Dismemberment insurance
Accidental death & dismemberment coverage (AD&D), however, only provides benefits in the event of an accident. AD&D can be purchased as a standalone policy or combined with life insurance.
If you buy life insurance from your employer, the amount is often a dollar amount. According to your injury, the amount paid out for dismemberment is different. You may, for example, receive the entire benefit of your policy if an accident blinds you but only receive 25% if you have lost a finger. Your policy will list the exact amount of payout.
AD&D insurance has limitations, just as life policies do. They don’t cover high-risk sports like car racing or skydiving. Also, they do not cover death or injury caused by a drug overdose, driving under the influence, surgery complications, mental illness, and complication from surgery. Check your insurance policy to see if there are any activities that you’re not covered for.
How AD&D and life insurance work together
AD&D is covered by many life insurance policies that you purchase through your employer. If your term life policy is worth $10,000, you could also get AD&D coverage of the same amount. If you die of natural causes in this case, your beneficiary will receive $10,000. Your beneficiary will receive $20,000 if you die in an accident ($10,000 AD&D + $10,000 term life = $20,000).
You can also purchase AD&D separately from other group policies. You can purchase an amount that is a multiple of the salary you earn to be paid out in case your accident death or accidental injury are covered under the policy. Let’s say, for example, that you purchased life insurance worth one-time your annual salary ($50,000). Your AD&D policy is for $25,000 Your beneficiary will receive $50,000 if you die of natural causes. Your beneficiary will receive $75,000 if you die in an accident ($50,000 for term life plus $25,000 AD&D = $75,000.
If you were injured in an accident and received the AD&D benefits, your life insurance benefit would still be intact. If you have an AD&D insurance policy for $25,000, and you lose a leg due to a car crash, you may receive 75% ($18,750) of that amount. The beneficiary will receive nothing.
You need them both.
Many group policies for term life offer AD&D protection at no extra cost. It’s obvious that in this situation, you should accept coverage.
Before you decide whether or not to buy a policy, consider the lifestyle you lead. Do you surf regularly? You ride your four-wheeler on the weekends during the hunting season. You may wish to consider AD&D insurance if you said yes. Accidents can happen to anyone, even if they aren’t adventurous or don’t often engage in situations that would be unfamiliar. AD&D coverage could provide an extra safety net.
No matter what your lifestyle is, adding AD&D and life insurance coverage can provide a comprehensive protection for you and your family in the event of a serious accident or death.
TL;DR Too Long; Didn’t Read
Your loved ones’ financial security can be protected by Life and AD&D.
- Term life: Provides individual protection for a specified number of years. Most common are terms of 10, 20, and 30 years. Your beneficiary receives the entire death benefit if you die during the policy term.
- Whole life: This policy provides you with a death benefit that is guaranteed. It covers your whole lifetime and will pay the full face amount up to your maximum age.
- Universal Life: This policy allows you to accumulate savings with time, but also offers flexibility in investing your money and earning cash value.
- If you die or are injured in an automobile accident, Accidental Death & Dismemberment will pay benefits. AD&D can be purchased as a standalone policy or combined with life insurance.
