Bring Your Life Insurance Home from Work

Only 44% of American households have individual life insurance — a 50-year low.¹ Perhaps this is because life insurance is a fairly common employee benefit. However, relying on a group policy through your employer means that the coverage could end if your job situation changes.

An important reason to own life insurance is to replace your lost income and provide your survivors with a source of cash (up to the policy limits) to help them pay living expenses. One way to help insulate your life insurance coverage from the unpredictability of your employment situation is by purchasing an individual policy. Depending on the type of policy you select, you may be able to obtain coverage for a specific number of years or for life.

Temporary Protection with an Expiration Date

As the name suggests, term life insurance offers a death benefit if the insured dies within the covered time period, which could range from one to 30 years. The death benefit is typically not subject to federal income tax, unless the employer pays the premiums.

Term life generally has a lower premium than permanent life insurance, particularly at the beginning of the term. With some term policies, the premium adjusts each year, whereas with others the premium remains fixed for the full term. You may be able to continue coverage beyond the original term at a higher premium, or even convert to a permanent policy (subject to age restrictions and policy minimums) while the policy is in force.

Lifetime Protection with No Expiration Date

Permanent life insurance 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 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 at a minimum guaranteed rate for the life of the policy. You may be able to borrow against the cash value during your lifetime to help pay for retirement 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. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. And if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

Ask yourself whether you are willing to stake your family’s financial future on group coverage that could change unexpectedly. An individual policy could help prevent gaps in your coverage.

1) LIMRA, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.