Life Insurance: Do I Need It?

Life insurance is a financial contract between the insurer (the insurance company) and you (the insured policyholder). You make regular payments, known as life insurance premiums, to the insurance company to maintain the policy's active status. Should you pass away while the policy is active, the insurance company pays a lump-sum payment, referred to as a death benefit, to your designated beneficiaries. The death benefit can help cover essential expenses, maintain your loved ones' lifestyle, and can help provide financial security for their future.

Knowing the basics can help you choose the right policy for your needs and budget. At a high level, here's how life insurance works:

• You choose a policy that fits your coverage needs and aligns with your budget. The two most common life insurance policies include term life insurance and permanent life insurance (more on comparing the policy types in the table below).
• You apply for coverage by submitting your application and going through any necessary underwriting process like a phone interview and/or a medical exam.
• You pay premiums to keep the policy active. Typically, premiums are paid on a monthly, quarterly, or annual basis. The premium costs can vary and largely depend on factors like age, health, policy type, and the amount of coverage needed.
• You name beneficiaries who will receive the death benefit should you pass away while the policy contract is still active.
• Your policy pays a death benefit when your beneficiaries file a claim if you pass away while your policy is still active.
• The policy ends once the death benefit is paid out. A policy can also be terminated early if the policyholder stops paying the required premiums that are needed to keep the policy in effect or if the coverage period for the policy expires.

Having a life insurance policy can provide meaningful emotional and financial benefits for you and your family. Life insurance can provide a financial safety net for your loved ones, even if you're gone by:

• Replacing your income in the event of your death so your beneficiaries can cover basic living expenses like paying off the mortgage, paying bills, paying off car loans or credit card debt, or funding a child's education.
• Helping your family cover final expenses like funeral expenses, burial costs, and high medical bills, all of which can be substantial expenses your loved ones could face following your passing.
• Giving your family peace of mind knowing they'll be financially protected if you're no longer here. A peace of mind can be especially important during a time of grief, allowing your loved ones to sort through emotions, finances, and logistics without the added stress of financial uncertainty.
• Providing a financial legacy for people, places, or charities you care about. Whether you want to leave a financial legacy for your family or want to provide a philanthropic legacy by designating a charity as your beneficiary, your values can endure well beyond your lifetime and can be a lasting gift for the people and/or causes you care about.

Life insurance policies can also help:

• Cover long-term care costs, should you need long-term care or become chronically or terminally ill. Certain policies allow you to access a percentage of your policy benefit to help pay for medical bills and unexpected expenses that can occur.
• Cover business costs if a business owner or key employee dies. The insurance proceeds can potentially help pay outstanding business loans, help with operating costs during the ownership transition, and/or provide money for a buyout by a surviving owner.
• Cover estate taxes for individuals with substantial estates that may incur significant federal or state estate taxes. Life insurance proceeds can help pay for estate taxes and/or cover settlement costs, potentially protecting your loved ones from having to sell assets or a business(es) upon your death.

There are two main types of life insurance: term life insurance and permanent life insurance. We suggest choosing life insurance primarily for the ability to replace income, but the decision will ultimately be based on your coverage goals and how long you want the protection to last.

Term life insurance covers you for a specific period of time, typically ranging from 10 to 30 years. Term life insurance can make a lot of sense if you have dependents and have an income-replacement need.

• It's generally more affordable than permanent life insurance.
• It offers straightforward protection, without a savings component.
• It allows you to choose a coverage term that aligns with your specific goals, like paying off a mortgage or funding your children's education.

• If you outlive the term, the policy expires and no death benefit is paid.
• Renewal premiums may rise significantly.

• Level Term: The premium and death benefit remain the same throughout the term.
• Decreasing Term: The death benefit decreases over time, often used to cover a specific debt like a mortgage.
• Annual Renewable Term: The premium usually goes up each year, like with group life insurance.
• Convertible Term: Allows the policyholder to convert the term policy to a permanent policy without undergoing another medical exam.

Permanent life typically covers you for your entire life as long as premiums are paid. Permanent life insurance can make sense if you have complex needs—for example, if you want to create a lifelong financial safety net for a child with special needs or have specific estate planning, long-term care, or business needs.

• A death benefit is guaranteed regardless of when you pass away.
• It includes a cash value feature that builds over time that you may be able to borrow from or withdraw.
• It offers stability, with fixed premiums and predictable benefits in many types of policies.

• Permanent life insurance is generally more expensive than term life insurance due to its lifelong coverage and cash value component.
• These policies can be more complex, with various features and fees that may not be immediately apparent.

• Whole Life Insurance: Offers lifelong coverage with fixed premiums and a cash value. The cash value grows at a predetermined rate and can be accessed through loans or withdrawals.
• Universal Life Insurance: Provides lifelong coverage with more flexibility in premium payments and death benefit amounts. The cash value grows based on a determined interest rate, and you can adjust the policy to fit your changing financial needs. But, note that choosing not to pay the premium could reduce the death benefit or cause the policy to lapse.
• Variable Life Insurance: Combines lifelong coverage with investment options. The cash value is invested in subaccounts, similar to mutual funds, and the death benefit can vary based on the performance of these investments, which can go up or down.

Consider speaking with an insurance expert or financial advisor to assess your coverage needs and how life insurance fits into your financial plan.

The amount of life insurance you need largely depends on your income replacement need(s), liabilities, family situation, and long-term financial goals.

A good place to start estimating your coverage needs is by asking yourself how your loved ones would manage expenses if something were to happen to you. How much money would your family need to:

• Replace your monthly income for at least five to 10 years, or until your children are grown and out of school
• Pay off major expenses like your mortgage as well as any accumulated debt like car loans or credit card debt
• Fund certain family goals, like a child's education by paying for any private school tuition or college tuition
• Cover emergency expenses or a drop in your spouse/partner's income
• Pay any final expenses like estate settlement costs, funeral costs, or medical bills

Once you have a rough idea of how much coverage you need, talk to a professional to discuss which policy type and coverage amount best fits your needs and budget.

If you're unfamiliar with life insurance terminology, navigating terms frequently referenced in policy descriptions and contracts can be confusing. Understanding these common life insurance terms can help you make more informed decisions about what type of policy and coverage is right for you.

Contract: A legally binding agreement between the life insurance company and the policyholder that defines the policy's terms like the death benefit, premium payment amounts, and the duration (period of time) of the agreement.

Policyholder: The policy owner who has purchased and holds the insurance policy.

Insured person: The person whose life is covered by the life insurance policy.

Premiums: A regular payment made to the insurance company to keep the policy active and helps ensure that the beneficiaries receive a death benefit if the policyholder passes away while the policy is still active.

Term Life Insurance: A type of life insurance policy that provides coverage for a specific period of time (the term), like 10, 20, or 30 years, in exchange for a pre-established premium. Should the insured pass away while the policy is active, the designated beneficiaries receive a lump-sum payment known as a death benefit. If the insured outlives the policy terms, the coverage expires, and no death benefit is paid.

Whole Life Insurance: A type of permanent life insurance, a whole life insurance policy provides the policyholder with coverage for the insured's entire life if the policyholder continues to pay premiums as outlined in the contract. Whole life insurance typically features a "cash value" investment where a portion of the premium payment is designed to grow tax-deferred and can sometimes earn interest. Some plans allow the policyholder to borrow against the policy's cash value or apply it to future premiums.

Variable Life Insurance: A type of permanent life insurance that combines lifelong coverage with investment options. The cash value is invested in subaccounts, similar to mutual funds, and the death benefit can vary based on the performance of these investments, which can go up or down.

Universal Life Insurance: A type of permanent life insurance that provides a flexible premium payment structure and flexible death benefits, along with a cash value component, which can be fixed or capture a portion of a specific index.

Death Benefit: Also referred to as the payout, it's the amount of money paid to the designated beneficiaries when the insured person passes away, assuming the policy is still active.

Beneficiary: The person(s) named in the policy as the designated recipient of the life insurance proceeds. The named beneficiaries can be a spouse, children, entity (trust or charity), or estate.

Life insurance rider: An optional, supplemental add-on to a life insurance policy that provides extra benefits or coverage for an additional cost.

Waiver: An insurance policy clause that temporarily suspends premium payments for a set period of time if the policyholder becomes critically ill, injured, or disabled. The policy remains active during this period.

Exclusions: A life insurance claim can be denied under certain situations or circumstances as outlined in the contract, even if the policyholder dies. Suicide is often a standard exclusion in contracts.

Payout: Known as a death benefit, the payout is the amount of money paid to the designated beneficiaries when the insured person passes away, assuming the policy is still active.

Once you secure a life insurance policy, double-check it every three to five years or after a significant life event to make sure your existing coverage is adequate based on your current lifestyle and expenses. For example:

• If you married recently or have a new child, have you designated your new family members as beneficiaries on your policy? And is your current coverage still adequate to cover your expenses?
• If your income has increased over the years, is your current coverage enough to replace your new income?
• If you purchased a new home, would your policy cover the cost (and length) of your new mortgage?
• Would a different type of policy be more cost effective for you if your needs have changed?
• When will your policy expire? And do you need a new policy to extend the length of your initial term?
• If you have group life insurance coverage through your employer, can you keep the policy if you leave the company?

Thinking about life insurance can be difficult, and for good reason. It's a highly emotional topic that comes with some important financial considerations and decisions. However, taking the time to assess the important role it can play in your life to help you protect and support those who matter most is an invaluable gift, no matter what the future holds.