In the unfortunate event of your passing, life insurance serves to safeguard your family’s financial future. It ensures that your loved ones have the means to support themselves after you’re gone. A recent study by the Life Insurance and Market Research Association found that more than half of Americans lack individual life insurance policies, with 30% having no coverage at all.
What is Life Insurance?
Life insurance is a policy that provides a specified sum of money upon the death of the insured. The benefits are disbursed to the designated beneficiary or beneficiaries named in the policy. Two of the most commonly used types of life insurance are:
- Life insurance for a specified period
- Individual coverage is provided 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.
- If you buy individual insurance when you’re young and in good health, you can lock-in a lower premium.
- Life insurance
- This policy provides a death benefit that is guaranteed. It covers the entire duration of your life, and the value will be paid up until the age maximum.
- The premiums for the term policies are more expensive because they earn cash and offer a higher death benefit.
Take a closer look at these policies.
Life insurance for a specified period
Term life insurance is widely regarded as the most accessible and budget-friendly option, making it straightforward to grasp. This type of policy offers coverage for a predetermined duration, typically spanning 10, 20, or 30 years. If you pass away during this coverage period, the designated beneficiary receives the full death benefit.
For example, you might opt for a term policy valued at $1,000,000 that provides coverage for 20 years. Should you die in the 17th year, your beneficiary would receive the entire amount of $1 million. However, if you outlive the 20-year term, the policy may lapse without any payout.
There are three primary categories of life insurance policies:
Level term insurance offers a fixed premium along with a specified death benefit. - Annual renewable term life insurance allows you to pay a monthly premium. You will see your premiums increase with age. However, you can renew the policy even if you do not have proof of insurance.
- Decreasing term life insurance features a fixed premium, but the death benefit reduces in value as time goes on.
No matter which policy type you select, benefits will be paid out upon death.
What is the cost?
The most affordable choice is term insurance, as you only buy coverage for a specific period. Premiums are determined by the death benefit amount and the policy’s duration. Insurers will take into account factors like your age, gender, health status, and anticipated lifespan.
Provided you pay your premiums in full, the policy will remain active until its expiration.
At the end of a term, what happens?
If you outlive the policy’s term, you’ll have several options to choose from:
- You can renew the policy for an additional period.
- You have the option to convert it to a whole life insurance policy.
- You may cancel the policy at any time.
Group Term Life Insurance
According to the Bureau of Labor Statistics, 60% of employers offer life insurance to their full-time employees, typically in the form of a term policy.
You will remain covered as long as your employer continues to pay the premiums and you are employed there. Death benefits can be fixed amounts (e.g., $10,000) or based on multiples of your salary (e.g., 2x). This type of policy is often a guaranteed-issue plan, meaning you cannot be denied coverage due to pre-existing health conditions.
If you leave your job, you may have the option to transition to an individual plan. Generally, you won’t need to provide health evidence, although your premiums may rise.
Group Voluntary Term Life Insurance
Your employer may offer supplemental life insurance, which adds to the existing group coverage. This insurance is fully funded by you and is typically available in multiples of your annual salary or in fixed amounts such as $5,000 or $10,000.
The plan often includes a guaranteed issue amount, which allows you to obtain coverage without needing to provide health proof. However, if you wish to purchase a policy that exceeds this amount, you will be required to submit evidence of insurability.
Tax Implications of Life Insurance
When you purchase an individual term insurance policy, you pay the premiums with after-tax dollars. As a result, your beneficiaries won’t be liable for taxes on the death benefits they receive. The same tax treatment applies if you have a life insurance policy provided through your employer.
However, the value of group life insurance and any supplemental policies can be counted as part of your taxable income. Generally, if your coverage is less than $50,000, you won’t incur any taxes. If your coverage exceeds this amount, the IRS may require you to pay taxes on the difference between the fair market value of the insurance and the amount you paid.
For those with group term and supplemental life insurance from their employer totaling less than $50,000, there is no income tax liability. For any group term insurance exceeding $50,000, the IRS assigns a fair market value. You may be taxed on the difference if you’ve paid less than this fair market value. For further details on fair market value calculations, please visit the IRS website.
Life insurance
Permanent or whole life insurance provides a guaranteed death benefit. This type of policy covers you for your entire lifetime, and the benefit will be paid out up until the specified age limit.
Whole life insurance differs from term insurance in that it accumulates cash value throughout 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 only pay taxes on the amount when you withdraw it.
Additionally, some policies may offer dividends, which you can choose to withdraw as cash or reinvest into your policy. This can help cover premiums, pay off loans, or enhance the death benefit.
What is the Cost?
Whole life insurance is generally 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 premiums are paid on time, the policy remains active.
Can You Borrow Against a Whole Life Insurance Policy?
Yes, a whole life insurance policy allows you to borrow against its cash value. Some policies 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.
Tax Implications of Life Insurance
Benefits from whole life insurance are typically not subject to taxes for the beneficiary. However, there are specific circumstances where taxes may apply. For example:
- If you withdraw cash value early, you may owe taxes on any amount exceeding the premiums you paid.
- Dividends may be taxable if they surpass the total amount of your premium payments.
- Any unpaid loan balance may be treated as taxable income.
For more details on tax implications related to your insurance, visit the IRS website.
Compare term life and whole-life insurance
There is no one-size fits all solution to protecting your family against income loss.
Terms of Life Insurance
Purchasing term life insurance while you’re young and healthy allows you to secure lower rates. In many cases, it can be more affordable than the coverage offered by your employer. If you’re facing health issues or find individual insurance too costly, group coverage might be a better option for you.
Whole Life Insurance
Whole life insurance is a great 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.
Compare policy features
The side-byside comparison will show you what the policies have in common and where they differ.
| Features of Policy | Term Life Insurance | Whole Life Insurance |
| The policy lasts for a certain amount of time | X | |
| The premium can be changed each year | X | |
| The Premium level remains the same | X | X |
| Lifelong Coverage is included in the policy | X | |
| Guaranteed Death Benefit | X | |
| Accumulates cash value | X | |
| Annual dividends available | X | |
| Beneficiary Death Benefit | X | X |
| Riders add new coverage options | X | X |
More information
Speak to your benefits advisor or broker if you want more information on how whole or term life insurance will benefit your family. You can ask them questions and they will help you decide which coverage type is best for you. They can also determine how much insurance you need.
