Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Part of creating a well-rounded financial strategy is addressing the “what if” questions that are often hard to face. For example: If you didn’t make it home tonight, how would your loved ones fare financially?
Life insurance is a tool used to help provide a net for your spouse, children, and anyone else who depends on you. If you’re one of the 41.8 million unpaid caretakers looking after an older loved one, they may also depend financially on you.1 Life insurance can offer financial protection for them too.
Here are five truths about life insurance that we hope inspire you to consider coverage soon.
Truth #1: You Have Choices
As a general rule, the younger you are when obtaining life insurance, the less expensive the monthly payments will be. The longer you wait, the higher the likelihood your age or physical health will impact your premiums. A high body mass index, smoking habits, chronic health issues, dangerous work, or extreme hobbies (such as skydiving) can all increase your premiums.
The type of insurance policy you choose can also impact your monthly premiums. There are two primary choices to weigh: term and whole.
Term Life Insurance
Term insurance is the simplest form of life insurance. It provides temporary life insurance protection on a limited budget. Term covers an individual for a set period of time, say 10 or 20 years. Once the coverage period has ended, the policy is terminated.
Term life insurance is a common choice for young couples or families with children looking to provide protection.
Whole Life Insurance
Whole life insurance is designed to have no set end date. While it’s more expensive than term, some families or individuals use it as an investment vehicle to help pursue their long-term financial goals. That’s because as you pay your premiums over time, the cash value of the policy grows—typically tax deferred.
Truth #2: Riders3 Help Personalize Coverage
Riders are add-ons that help individuals personalize their life insurance coverage. For some families, the base policy is a good start, but doesn’t quite offer all the coverage and benefits they’re looking for. That’s where a rider may help. Depending on your provider, riders can either be added for an additional charge or may already be built into the policy’s premium.
Common life insurance riders include:
- Guaranteed insurability rider: This gives the policyholder the right to buy more life insurance in the future without having to complete another medical exam.
- Return-of-premium rider: The policyholder may receive a portion or all of their premium payments if they outlive the coverage period of their term life insurance policy.
- Accidental death or double indemnity rider: The payout of your policy is increased in the event of a covered accident, such as a car crash, choking, or drowning.
- Extended care rider: In the event you are unable to care for yourself due to chronic illness, you may access your death benefits while still living.
- Child term rider: Add a child to your existing policy, rather than obtaining a separate policy for them.
Truth #3: Life Insurance Has Potential Tax Benefits
Should your beneficiaries receive a payout from your life insurance policy, they are generally not required to report the proceeds to the IRS.
Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them.2
There are, however, a few exceptions to this rule.
If the death benefits are paid out as installments, the beneficiary will receive payouts over time instead of one lump sum. The principal amount of the death benefit is then held in an account that accrues interest. As the beneficiary receives a percentage of the death benefit in regular installments, they are responsible for paying income tax on any interest earned.
Truth #4: You Can Ladder Life Insurance Policies
Your life insurance needs will change as you age. But the problem is, the longer you wait to buy, the higher the premiums. The ladder strategy is an effective way to buy multiple term life insurance policies and stagger their expiration dates. This, essentially, may help you get the best deal on premiums while addressing your future coverage needs.
Here’s how it works:
You and your spouse are 35 years old and have two kids under six. Over the next 10 years, you need a policy to cover your mortgage, remaining student loan debt, and any costs associated with raising your children. In 20 years, your mortgage will be paid off, and your kids won’t be so dependent on you – but they still may need assistance paying for school, weddings, down payments, etc. Thirty years from now, your adult children will be completely independent. However, you still want enough coverage to keep your spouse comfortable in the event of your passing.
To address these needs, you obtain three policies now:
- 10-year policy for $250,000
- 20-year policy for $250,000
- 30-year policy for $250,000
For the next 10 years, when you need the most coverage, you’ll have a total death benefit of $750,000. Once the 10-year policy ends, your 20-year and 30-year policies still have you covered for $500,000. And for the last 10 years, your coverage is $250,000.
Truth #5: It’s Possible to Help Protect You, Your Business and Your Family
Small business owners are often engrossed in the day-to-day of building their business. But many haven’t stopped to consider what would happen to their business in the event of their passing.
There are two primary ways in which you can protect your business through life insurance.
Key Person Insurance
Your business can actually purchase a life insurance policy, called key person insurance, that pays out in the event that you (or another key employee) die. The benefit is payable to the business and is intended to help keep the business up and running while the remaining employees work to find a replacement or restrategize.
A Life Insurance Funded Buy-Sell Agreement
This setup is designed to protect surviving family members with fair compensation in the event of an owner's passing. Any remaining founders or owners may buy the deceased owner’s stake in the company at a price that has been agreed upon previously by all parties.
Helping Protect Your Loved Ones with Life Insurance
The last thing anyone likes thinking about are the financial ramifications of their sudden passing. But at a time when your family is feeling a tremendous loss, life insurance can be a source of stability and comfort.
As you consider what type of policy is right for you and your family, don’t hesitate to reach out. Let’s explore your choices, discuss your long-term needs, and determine how this will fit into the rest of your financial picture.
This article is for informational purposes only and is not a replacement for real-life advice. Make sure to consult your legal professional if you have questions about your estate strategy. A financial or accounting professional also may be able to provide some guidance.
Sources:
2https://www.agingcare.com/articles/who-are-family-caregivers-459287
3 Riders may incur an additional cost or premium. Riders may not be available in all states.
Whole Life insurance is intended to provide death benefit protection for an individual’s entire life. With payment of the required guaranteed premiums, you will receive a guaranteed death benefit and guaranteed cash values inside the policy. Guarantees are based on the claims-paying ability of the issuing insurance company. Dividends are not guaranteed and are declared annually by the issuing insurance company’s board of directors. Any loans or withdrawals reduce the policy’s death benefits and cash values and affect the policy’s dividend and guarantees. Whole life insurance should be considered for its long-term value. Early cash value accumulation and early payment of dividends depend upon policy type and/or policy design, and cash value accumulation is offset by insurance and company expenses. Consult with your Guardian representative and refer to your whole life insurance illustration for more information about your particular whole life insurance policy. Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information. The content is developed from sources believed to be providing accurate information. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.