Understanding Life Insurance: Contracts, Employer Provided & Whole vs Term

Obviously no one enjoys contemplating death, but purchasing life insurance to protect the financial wellbeing of your loved ones should rank high on your to-do list. If anyone relies on you financially, a spouse, children, or other dependents, you absolutely need life insurance! If you die, a life insurance payout (death benefit) provides financial compensation for those who relied on your income. Life insurance can help cover the cost of funeral expenses, outstanding debts (such as mortgages and student loans), future educational expenses, and the loss of income.

Who’s Involved in a Life Insurance Contract?

Life insurance is a monetary contract that involves four primary parties:

1.     Insurer – the insurance company

2.     Owner – the person or entity who makes the premium payments to the insurance company

3.     Insured – the person whose life the policy insures

4.     Beneficiary – the person or estate who will receive money from the policy in the event of the Insured’s death

 What About Employer-Provided Life Insurance?

Employer Provided Life Insurance is a form of term insurance offered as part of your Employee Benefits Package. The Employer is the owns of the contract but you’re the insured and choose the beneficiary. The term is based on your continued employment with the employer. When that ends, so does your life insurance. This can leave you and your dependents financially vulnerable.

 For this reason, I always recommend getting your own life insurance policy as early as possible - while you’re still healthy. That way you own your Life Insurance policy and it travels with you regardless of your employment status. This practice is particularly important today as many of us face lay-offs because of mergers and “downsizing”. Older workers who counted on Group Sponsored Term Life policies offered through work may find themselves financially vulnerable and uninsurable if they didn’t also secure their futures with an Individual Life Insurance policy when they were younger. They may now have health conditions that render them “uninsurable”. Even if they can qualify for insurance, the rates they ‘ll now pay for similar coverage will be substantially higher simply because they’re older – in a different age group.

Buy an individual life insurance policy when you’re young – the monthly premiums will be lower and you’ll pay less over the course of the contract. Most importantly, you own it so you don’t risk losing coverage when you have a change in employment or health.

What is the Difference Between Whole vs. Term Life Insurance?

Term Life Insurance covers you for a specific period of time. Standard lengths for Term Life Insurance include 15, 20, or 25 years. If you die while the policy is intact, your beneficiary will receive the life insurance death benefit. The value of the death benefit varies depending on the chosen policy, but typical amounts can range from $100,000 to $500,000. Employer-provided life insurance is also an example of Term Life Insurance – but it only covers you for the length of time the company employs you.

 If you’re alive when a Term Life Insurance contract ends, you and your beneficiaries won’t receive a death benefit. (However, it’s important to remember that the gift of life certainly counts as a benefit!)

Whole Life Insurance, on the other hand, covers you as long as you live.  Whenever you die, the death benefit generally passes tax-free to your designated beneficiaries. It’s also possible to leverage a Whole Life insurance contract for financial use while you’re still living, but it’s essential to understand the implications of doing so. Read more about those considerations below.

What Should I Consider When Choosing Whole vs. Term Life Insurance?

Term Life Insurance policies are best-suited to cover specific seasons of life, such as when your children are young or financially dependent on you. Term Life Insurance policies are very affordable. They’re helpful if income is tight or if much of it is going toward the care of your dependents.

Many people find the need for life insurance lessens as they get older. If your dependents have left home or can support themselves, the need to leave a large amount of money behind decreases dramatically.

Whole Life Insurance is more expensive than Term Life Insurance, but it offers locked-in rates that won’t increase as you age or if your health changes. It can also be used to set aside money for the future – with some caveats. Each time you pay the premium for a Whole Life Insurance policy, a bit of that money gets invested and saved for you. This may not be the most effective strategy for saving money. Investing in a 401(k), IRA, or the stock market will likely yield a higher rate of return. However, if like most Americans you have a difficult time with disciplined saving, taking advantage of a Whole Life Insurance policy as a saving vehicle can be a good option. After a certain amount of time, 20 years, for example, it’s possible to access the pool of savings within your Whole Life Insurance policy. You can borrow against the value of the accumulated savings, (the cash value) at favorable interest rate, with the option to pay back what you’ve borrowed. You may also cash-out the policy to generate income after retirement or convert it for Long-Term Care needs. Be aware that cashing-out the policy may have tax consequences.

Depending on the type of Whole Life policy you invested in, you may pay a premium for a specified number of years or for the life of the policy. If you opt for a Term Life insurance Policy you will pay monthly premiums for the term of the policy Ie: 10, 20, 25 years etc. If you die when your policy is still intact, your beneficiaries will receive the death benefit - in most cases, tax free.

 Each person’s Life Insurance needs varies depending on their financial situation and stage of life. If you’re interested in learning more and would like help finding the option best-suited for you and loved ones, please call or text Joanne of Insurance Solutions Plus at 314-518-8266 or send a message here.