Life insurance is a crucial part of your financial plan. It can help you provide for your family after you die —and even during your lifetime.
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Life insurance helps you provide for the people who depend on you. You pay a premium for a life insurance policy, which pays a death benefit to your loved ones after you die. The death benefit can help your family in several ways:
Many life insurance policies have set expiration dates, but permanent policies are different.
A permanent life insurance policy provides you with a death benefit no matter when you die, assuming that you keep paying premiums. This differs from a term life insurance policy, which has an expiration date. A permanent policy may also offer additional benefits, such as:
With certain additions, permanent life policies can also help cover the expense of your care if you become disabled.
Most people have someone who would suffer financially after their death. We most commonly think of families with dependent children. However, there are other people who should have life insurance, including:
There are three basic categories of life insurance: term, whole, and universal. Whole and universal life fall under the umbrella of permanent life insurance.
A term life insurance policy guarantees you coverage for a set duration, usually one to 30 years, or until you reach a particular age with an annual premium renewal. Most companies give you the option to renew, but premiums may be higher for the renewed policy.
Many people find that when they buy term insurance instead of permanent life insurance, they initially pay significantly less premium for the same face amount and can often secure a higher death benefit and still fit their budget.
This type of permanent life insurance policy offers death benefits and premiums that remain stable throughout your lifetime.
A whole life policy also allows you as a policyholder to build tax-deferred cash savings. After a certain period, you have the option to borrow from that accrued cash value. The amount you borrow comes out of your death benefit, but you have the option to repay it with interest.
You can also use the cash value of your policy to stop paying premiums for as long as the account holds value. If the money runs out—or if you want to restore your cash value—you can resume premium payments.
Universal life is another form of permanent life insurance. Like whole life insurance, universal life builds cash value that you can borrow against. This loan may be tax-free in some cases.
A universal life policy does offer flexible premiums, which will help your changing needs and budget. The flexibility exists because a universal life policy invests your assets in slightly riskier products.
You can add other benefits to your life insurance policy through add-ons called riders. One popular type of rider provides living benefits, meaning that you can use your policy’s death benefit if you experience a qualifying medical event.
Events that qualify for living benefits are typically those that shorten your life or impact your ability to care for yourself and your loved ones.
Living benefits riders typically define a terminal illness as one that would result in death within 24 months. The insurer usually requires certification of the illness from a physician.
Living benefits can also help with expenses or lost income due to an illness that impacts at least two activities of daily living, such as bathing, dressing, or toileting. The rider may specify that, to receive benefits, you must be one of the following:
In general, a condition that requires you to live in a nursing home or other institution would likely qualify for living benefits.
Critical illnesses are those that would dramatically impact a person’s lifespan without extensive medical intervention. Example conditions include but are not limited to:
An insurance commissioner may determine what qualifies as a critical illness.
Eligible injuries are those that cause significant impairment or loss of income. Examples include:
In most cases, you can use living benefits to cover any expenses related to your qualifying illness or injury. Such expenses may include:
Quality-of-life expenses (in-home nursing or personal support, occupational therapy)
To be safe, check the regulations in your state before you make plans. In Massachusetts, for example, you can only use living benefits for long-term care.
When your family depends on your income, your early death or an incapacitating illness could significantly change their standard of living. Life insurance provides financial security when you cannot. And right now, in the middle of a pandemic, be prepared to expect the unexpected. For information on how to navigate life insurance during a pandemic, click here.
Certain life insurance products can also help provide financial security during your lifetime. A permanent policy with a cash value account can give you another income stream and potentially help you to achieve your retirement goals. Living benefits give you even more options by enabling you to access your death benefit if you experience a qualifying medical event.
