Understanding Your Life Insurance Choices
Start with the people who depend on you, the financial responsibilities you want to cover, and the payments you can comfortably maintain. Most life insurance falls into two broad groups: term coverage for a defined period and permanent coverage designed for longer-lasting needs.
Term Life Insurance
Term insurance covers a chosen period, often 10, 20, or 30 years. It can help replace income, pay a mortgage, or support children while they are growing up. For a comparable death benefit, it generally costs less initially than permanent insurance.
With a level-premium term policy, the premium stays the same during the guaranteed level period. If the insured person dies while coverage is in force, the policy pays the stated benefit, subject to its terms. Death benefits are generally free of federal income tax, although exceptions and other taxes may apply. Standard term insurance does not build cash value and usually pays nothing if the insured person outlives the coverage period.
- Renewable term: Some policies let you continue coverage without new health evidence, up to policy limits. Renewal premiums typically increase with age.
- Convertible term: Some policies allow a change to eligible permanent coverage without a new medical exam or proof of insurability. Conversion deadlines, available policies, and other conditions apply.
Permanent Life Insurance
Permanent insurance is designed to remain in place for life if required funding and policy conditions are met. It may suit an ongoing dependent-care need, estate or business planning, or a desire to leave a legacy. Premiums are usually higher than term coverage for the same initial death benefit.
Many permanent policies accumulate cash value, generally with tax-deferred growth. Premiums help fund insurance charges, policy expenses, and cash value according to the contract. Accessing cash value through loans or withdrawals can reduce policy values and the death benefit, and may cause taxes or a lapse. Not all values or illustrated growth are guaranteed.
Common Permanent Policy Types
- Whole life: Traditional whole life generally offers scheduled fixed premiums and guaranteed cash values and death benefits when contract requirements are met. Participating policies may pay dividends, but dividends are not guaranteed.
- Universal life: May offer adjustable payments and death benefits within policy limits. Sufficient funding is needed to cover ongoing charges; paying a planned premium does not always guarantee lifetime coverage.
- Indexed universal life: Interest may be linked to an index formula, with caps, participation rates, and other limits. Cash value is not invested directly in the index. Policy charges can reduce cash value even when the crediting formula has a floor.
- Variable life and variable universal life: Cash value depends on selected investment options and can lose value. Investment performance, fees, and funding affect policy results.
- Final expense insurance: Usually a smaller permanent policy intended to help with funeral costs and other final bills. Eligibility, premiums, and any graded-benefit period vary.
How to Choose a Starting Point
- Estimate the financial gap. Add the income support your household would need, debts, education or caregiving expenses, and final costs. Subtract assets and existing insurance available for those purposes. A simple income percentage may miss important needs.
- Match coverage to the timeline. A temporary need may fit term insurance. A continuing need may call for permanent coverage. Some households use a combination.
- Choose sustainable payments. Consider how premiums could change and whether you can maintain the policy alongside emergency savings, retirement goals, and everyday expenses.
- Review the details. Compare guarantees, exclusions, renewal and conversion terms, surrender charges, and any optional benefits. Review existing coverage before making a replacement decision.
Greg & Adele can help you discuss your priorities and understand the choices. This overview is general information; benefits, costs, eligibility, and guarantees depend on the policy. Consult appropriate tax or legal professionals for advice about your circumstances.