Thank you to Britany Enelow from the Credit Union of New Jersey for her presentation on life insurance.  Life insurance is an often overlooked asset when planning for our financial future and can work to your advantage.  Different types of life insurance policies come with different benefits and restrictions so doing your research is key to finding the best deal.  Life insurance can also be a great financial vehicle in retirement and provide you with extra income or serve as an emergency fund should unforeseen events happen.  Let’s dive in and find out more!

What is Life Insurance?

Life insurance is a financial product that will pay out a cash death benefit to a designated beneficiary upon the death of the policy holder.  Life insurance policies require a premium to be paid in order to keep the policy in good standing just like car or homeowners insurance.  These premiums can vary depending on the type of life insurance and the coverage amount.  Life insurance payouts are tax-free and do not need to reported as gross income on your taxes; however, if your policy accrues interest, that money must be reported as interest income.

Life insurance can also act as a form of financial security for your family and loved ones.  In the event of your death, life insurance can serve as an income replacement, help eliminate debt, or help pay for future expenses such as college or buying a home.  Therefore, it is highly recommended that as we age, we incorporate life insurance into our financial portfolio and update our policies as our situations change.

Types of Life Insurance

There are a few different types of life insurance that offer a variety of benefits:

• Term – Term life insurance policies are set for specified period of time before they expire; for example, 10, 20, or 30 years.  Upon the expiration of the policy, no benefit is paid out.  However, you can extend the policy, but the premiums will increase annually.  Term policies tend to have the lowest premium costs and usually, the premiums will not change for the duration of the term.  Also, the longer the term, the higher the premium.
• Annually Renewable Term – While it is a type of term policy, premiums only cover one year at a time.  These policies start out with a lower premium than general term policies, but become more expensive after a few years so these are best used if you only need coverage for a short period of time.
• Permanent – Permanent life insurance policies last for as long as the premiums are paid and you don’t allow the policy to lapse.  Like term policies, some permanent policies offer a guaranteed premium amount that will not increase over the life of the policy, but these may have lower payouts.  Permanent policies can also build cash value that you can use to pay for a variety of things.  This will be discussed more below.
• Employer Sponsored – Some employers will offer life insurance policies that are either partially or fully funded by the employer, but may offer limited benefits  These policies last for the duration of your employment and are usually not transferable upon your departure from the employer.  Generally the value of these policies is calculated based on your salary, such as 2 or 3 times the average of your annual salary over a period of time.  These policies can be changed, reduced, or dropped at any time so it is best not to solely rely on them.

While most life insurance policies do require a medical exam, there are policies out there that only require you to fill out a medical questionnaire and provide your medical records.  Generally, policies that do not require a medical exam have lower payout amounts and higher premiums.  Your medical information is used to assess your risk and determine your premium.

Permanent Policy Cash Value

As mentioned above, some permanent life insurance policies can accumulate a cash value that is reflective against the death benefit payout amount.  Just like retirement accounts or traditional bank accounts, money can be withdrawn from a life insurance policy to pay for bills, pay college expenses, or used to supplement withdraws from retirement accounts, especially during down financial markets.  There are no restrictions on what you can use the money for and it is not considered taxable income.  However, taking money out against the life insurance policy will reduce the policy’s overall cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

How Much Coverage Should I Purchase?

The first question we need to ask when considering life insurance options is what do we want the death benefit to accomplish.  Do we want it to pay off debts (mortgage, credit cards, personal loans), pay for the education expenses of our children or grandchildren, or serve as an income replacement for our family?  Next, look at your annual income, debt obligations, and any employer benefits (ex. health insurance) that may be unavailable to your family in the event of your passing.  You may also want to consider unpaid services that you provide, such as elder or child care, cleaning, transportation,  or home repair and maintenance.  There are many considerations when determining the right life insurance policy for you, so it is best to speak with a financial professional who can go over your options and determine the right fit for your financial situation and goals.

Even if you have one or more life insurance policies, it is always a good idea to review them annually.  Have your needs changed; has your health status changed; has your lifestyle changed?  Is your beneficiary(ies) up to date; if a beneficiary dies before the policy is paid out, state law will determine what happens to that money, which may or may not be next of kin.  Check the ratings of the financial company that issues your policy to see if there are any concerning developments, such as bankruptcy rumors or legal actions that could affect the quality of your policy.

More Information

For more information on life insurance and other investment topics, please visit https://www.cunj.com/invest/.  If you have any questions or wish to discuss your personal financial situation, please contact Britany Enelow at benelow@cunj.org.