Life Insurance: The Basics

Life insurance can offer significant benefits to your family and your finances. Read on to learn more about who needs life insurance, what it costs, and what you might not know about how to take advantage of this unique type of insurance.

Who Needs Life Insurance?

There are benefits to buying life insurance at any age or stage, but it is most often purchased by adults with minor children, a stay-at-home spouse, or other dependents to care for. A life insurance policy helps to ensure that if anything should happen to the family’s breadwinner, the other members of the family won’t find themselves in financial hardship. Life insurance can also be essential for joint property ownership, where one spouse would be unable to cover the monthly mortgage bills without income from their partner.

Older adults nearing or passing retirement age might also be interested in life insurance. An insurance policy can act as a vehicle to leave money to heirs or dependents, sometimes with more tax benefits and simplicity than other forms of asset distribution. Seniors can also utilize life insurance as a means to help loved ones cover the policyholder’s end-of-life expenses.

While it’s less common to hear about younger people buying life insurance, there are many policies designed for teenagers, young adults and even children. Purchasing a policy at a younger age enables policyholders to lock-in a low premium for a whole-life policy, and possibly offer cash value which could be used to assist with college tuition, a mortgage and so on.

Permanent vs. Term Insurance

Life insurance policies can be designed in a number of different ways to suit the needs and budget of the intended policyholder.

The most commonly purchased kind of life insurance is called term life insurance. A term life insurance policy lasts for a set period of time. If the policyholder does not pass away within this time period, there is no payout from the insurance policy.

Within the category of term life insurance, there are various options as to how the term will proceed. A level-term policy offers a fixed payout and premiums, whereas a yearly renewable policy offers the ability to re-start the policy at the end of the term, for increasing premiums. A decreasing term policy, on the other hand, has a declining payout but fixed premiums, and is often used in conjunction with a mortgage when the loan’s own principal is likewise decreasing.

Unlike term life insurance, permanent life insurance refers to a policy that lasts for the entire lifespan of the policyholder, ensuring that proceeds will go to beneficiaries. In exchange for this guarantee of payout, permanent life insurance typically brings more expensive premiums than term insurance. Permanent life insurance also offers the possibility of a cash value account, so policyholders can borrow against the value of their life insurance.

Borrowing Against Your Insurance

Life insurance doesn’t only benefit surviving family members. Policyholders with a permanent life insurance policy can borrow against the value of their policy, as an alternative to taking out a loan. The advantage of borrowing against life insurance is that it usually offers more flexible terms than a traditional loan. This can also be an option for people with a less-than-stellar credit score. However, taking out a loan can reduce the final payout of the insurance—so think carefully about what’s the right move for your particular financial situation.

Other Types of Life Insurance

If desired, a policyholder can opt to create an irrevocable life insurance trust for their term or permanent life insurance policy. The creation of a trust helps to limit the tax obligations on a sizeable payout, which may be useful for legacy planning. Families with special needs dependents may choose to fund an irrevocable special needs trust via life insurance.

There are many other specific types of life insurance, too. Life insurance can be designed to meet specific requirements or pay for designated expenses. Some policies, for example, are designed to cover burial and other end-of-life costs. Getting a full payment of burial expenses after potentially just a few months of life insurance premiums could significantly reduce burial and funeral costs for surviving family members.

How Much Does It Cost?

There are a wide range of price points for life insurance. Premiums are determined by type of policy, age and overall profile of the policyholder, and desired payout benefits. A starting price point would be around $26 per month, for a 40-year-old purchasing a 20-year term life insurance policy with a $500,000 benefit. But again—this figure may vary widely depending on your gender, smoking status, family medical history and driving record.

Keep in mind that while some life insurance companies offer guaranteed approval, others may deem certain applications ineligible. People belonging to high-risk categories, such as those who are living with a chronic illness or have been previously diagnosed with a serious disease, may be denied coverage.

Tax Implications

In most cases, life insurance payouts are not subject to estate or inheritance taxes, and beneficiaries don’t need to report their life insurance proceeds as gross income. This is one key reason why older adults may opt to use life insurance as a vehicle for leaving money to their family.

There are a few exceptions, including if the beneficiary opts to receive their payout in installments, or if proceeds from a life insurance policy cause the deceased’s overall estate to be worth over $12.06 million. If you have any concerns about taxes and inheritance, speak with a financial advisor.

Learn more about HUECU's Insurance Services at huecu.org/insurance