Life insurance can be confusing, misleading or flat-out intimidating for a lot of people. It’s no wonder that only about 54 percent of Americans have some kind of life insurance coverage.
Open enrollment kicks off in the fall for most companies, so now is the perfect time to evaluate your life insurance status, and make sure you have the coverage you need.
What is Life Insurance?
Life insurance is money that your loved ones receive if you die. It’s financial protection for your family if you’re no longer there to provide an income.
The payout is generally one lump sum to your beneficiaries, and they can use that money however they need to.
When you’re shopping around, you’ll notice that there are two main kinds of life insurance: term, and permanent. Choosing the correct one is very important for you and your family, so make sure you’re familiar with each before deciding.
Term life insurance provides coverage for a set amount of time, and the premiums don’t change during the life of the policy. It is the most affordable life insurance option. You’ll commonly see term insurance policy lengths of 10, 15,20, 25 or 30 years.
If you die during the term of your policy, your beneficiaries will receive that money tax-free. If the policy runs out and you still need coverage, you can usually renew the coverage on an annual basis, though you’ll likely pay higher rates.
But the goal with term insurance is not to cover you until old age. It’s really meant to cover you before retirement. Once you retire, you will hopefully have saved enough money that you won’t need a life insurance policy.
Permanent insurance is intended to provide lifelong coverage. The cash value component of these policies grows tax-deferred over time, and acts like a savings account to be withdrawn from later. The permanent insurance that most people are familiar with is whole life, but that’s not the only option out there. There’s also universal, burial and survivorship permanent life insurance policies.
Here’s a quick breakdown of each of those:
Whole life insurance includes the cash value investment component, plus a fixed death benefit. The premium rate and death benefit usually remain the same for the life of the policy.
Universal life insurance is similar to whole life, but it offers more flexibility. You typically have some freedom to change your premium payments and your death benefit. Your cash value will vary depending on the kind of investment your policy is tied to. For example, there are “indexed universal life insurance policies” – which are tied to indexes – and variable life insurance policies, which can be tied to a variety of investments.
Burial insurance is designed to only cover end-of-life expenses and funeral costs. It’s set up like a small whole life insurance policy, with a small death benefit.
Survivorship life insurance insures two people, often a married couple, under one policy. Once both people have died, the death benefit is paid out to the beneficiaries.
Term vs. Perm Life Insurance
Which insurance is going to give you the right coverage? This is a question that a lot of people understandably struggle with. Studying different insurance types and coverages isn’t exactly light reading.
My thoughts on this are that for most people, term is the better option. Why? Because life insurance is not an investment.
The money you save by using a term insurance policy can be better invested on your own, not through a permanent life insurance policy. In some situations, whole life can be a smart option. That would include wanting to leave an endowment to your alma mater, or wanting to make sure a certain amount of money goes to your kids no matter what. Some business owners also opt for whole life insurance to make sure they have the liquidity to pay their family out upon their death.
Whole life and universal life insurance gets suggested more in life insurance sales, so make sure you’re confident in which insurance you want before you shop around.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.