Coverage You Can Keep
In a 2015 study, 43% of Americans said they would feel a financial impact within six months if the primary wage earner died. Perhaps reflecting this concern, three out of 10 acknowledged that they needed more life insurance coverage.1
Four out of five consumers overestimate the cost of life insurance, which may explain why many people don’t always buy the insurance they need. Millennials, who can typically buy less-expensive coverage than older people, overestimate the expense by more than 200%, and Gen Xers overestimate by more than 100%. Many consumers also don’t understand the factors that could affect what they pay for coverage.2
If you think you need more life insurance, you might consider the costs and types of coverage that are available.
An Individual Policy
You may have group life insurance through work, but the face value of employer-based policies is generally low — typically one or two times your annual salary. Although the amount of coverage you need depends on a variety of factors, one traditional guideline suggests having coverage equal to seven to 10 times your salary.3 Just as important as the amount of your coverage is the continuity — you might lose coverage if you change employers.
An individual policy is yours to keep for as long as you pay the premiums. Two basic types of individual life insurance are available.
Term life insurance is generally the most affordable. As the name suggests, this type of coverage offers a death benefit if the insured dies within the covered time period, which could range from one to 30 years. Premiums may adjust each year or remain fixed for the full term. You might be able to continue coverage beyond the original term at a higher premium, or possibly convert to a permanent policy (subject to age restrictions and policy minimums) while the policy is in force.
Permanent life insurance (also called whole life) offers lifetime protection and a guaranteed death benefit as long as you keep the policy in force by paying the premiums. Although the premium is usually higher than for term insurance, it typically remains level for the rest of your life.
A portion of the permanent life insurance premium goes into a cash-value account, which accumulates on a tax-deferred basis throughout the life of the policy. You might be able to borrow against the cash value during your lifetime to help pay for retirement, education, emergencies, or other needs.
Withdrawals of the accumulated cash value, up to the amount of the premiums paid, are not subject to income tax. Loans (as long as they are repaid) are also free of income tax. Loans and withdrawals from a permanent life insurance policy will reduce the policy’s cash value and death benefit, and may require additional premium payments to keep the policy in force. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.
Keep in mind that policies commonly have mortality and administrative charges beyond the cost of premiums. If a permanent life policy is surrendered prematurely, there may be surrender charges and income tax implications.