Life Insurance Awareness month was in September but I want to bring it up again because I know of at least three people who passed away unexpectedly in the last few weeks. I know you have seen the GoFundMe Facebook posts asking for assistance with funeral costs. Every time I see one it bothers me, for many reasons but mostly because we need to be better informed of life insurance options, the benefits and how it can help your family pay for burial expenses and continue their standard of living after you pass away.
There are several benefits of having life insurance, such as:
- Paying final expenses (funeral, cremation and/or medical costs)
- Replacing your income
- Paying off debt
- Paying estate taxes
- Charitable contributions
There are two main types of life insurance with multiple options. I will provide an explanation of each so you will have the basics.
Term Life Insurance
Term life insurance only pays a death benefit if the insured person during the term. A term can be anywhere between 1-30 years and depending on your financial goals you may need another policy when the term expires and it does not include the savings & investment piece that is available in a whole life policy.
There are two different types of term policies, level term, and decreasing term. The death benefit (amount of the policy, ex. $250,000) stays the same throughout the full term in a level term policy. In a decreasing term policy, the death benefit decreases over the term.
Some people don't like term life policies because you have to replace the policy but there are ways that a term life policy can benefit you. Let's say I purchased a 30-year term policy when I was 25, when I'm 55 years old, the policy will expire. If I renew, the new policy will have a higher premium and may leave me uninsured if it is too expensive for my budget, but if I save the money for funeral costs (and build wealth), while I am still insured, I will not have to worry about renewing the policy (especially since my children would be grown).
Pros & Cons of Term Life Insurance
- Since you are only paying for the death benefit, you get more for your money
- Payment stays the same over the term
- Can be combined with riders (provision separate from the original policy) to meet your needs
- Normally not part of the estate
- Generally not subject to federal income taxes
- Does not have a cash building account
- Depending on the type of term policy it may be inflexible
- Only provides temporary coverage
Permanent (Whole) Life Insurance
There are 4 types of permanent life, whole life, universal life, variable life and variable - universal life.
Whole life insurance provides a death benefit along with cash accumulation for your lifetime. The cash value is invested in a "savings" account that grows on a tax-deferred basis. When you pay the premium, a portion of the payment is placed in the cash value account, which grows based on the dividend paid by the company. Over the long term, whole life is cheaper than term because it covers you for your lifetime.
Pros & Cons Of Whole Life
- Builds cash value tax-deferred
- Protection until death
- Earns dividends
- Premium never increases
- Loan availability
- Insurance company controls the investment
- Higher premium rate
- You are unable to change your plan
Universal Life is more flexible than whole life because you have the opportunity to increase the death benefit. There is a level death benefit similar to term life insurance and a cash account option similar to whole life insurance, but you have the option to pay flexible premiums. If your cash value account grows large enough, you can have the premiums pulled from the cash value account instead of making the payment out of pocket, but if it underperforms you may have to pay a higher premium to keep the coverage which is not necessarily budget friendly.
Variable life is similar to Universal life but the cash account is are to invested in stocks, bonds, and mutual funds. The cash account has the ability to grow quickly but it also has the risk of losing funds quickly. If the account does not perform well, the cash value & death benefit will decrease. Some policies have a guarantee of a minimum death benefit.
Variable-Universal Life.The policy is a combination of Variable and Universal Life (of course). You have the opportunity of investing in stocks, bonds, and mutual funds but you also have the flexibility of adjusting your premium.
Pros & Cons of Universal Life, Variable Life, and Variable-Universal Life
- Flexible premiums
- Cash value account grows tax-deferred and the death benefit is tax-free for beneficiaries.
- Loans availability
- Withdrawals up to premium paid are tax-free
- Premium can increase
- More expensive than term
- If the policy is canceled, gains are taxable income
- Cannot deduct losses
These are just quick facts to provide you with the basics about life insurance. My last and most important point is this, depending on the age of your child(ren) you do not have to purchase a separate life insurance policy for them. You can add a child rider with a predetermined amount to your coverage. For example, if you have a $250,000 policy you can add a child rider for $10,000, which should be enough to cover funeral costs.
Life insurance maybe daunting to think about but you don't want to add additional stress to your family while they are already grieving.
Do you have a life insurance policy?