Life insurance provides invaluable protection for your family in the event of your death. It ensures the ones you care about can continue to support themselves financially when you are gone. Yet, a recent study by the Life Insurance and Market Research Association reveals more than half of Americans do not have an individual life insurance policy and 30% have no life insurance coverage at all.
Term life insurance
Term life insurance is usually the most affordable type of life insurance you can purchase. It provides individual coverage for a specific number of years. The most common terms are 10, 20 and 30 years. If you die within the term of the policy, your beneficiary will receive the full death benefit.
For example, you purchase a $1 million term life insurance policy that provides coverage for 20 years. If you die during year 17 of the policy, your beneficiary will receive $1 million. If you do not die within the 20-year term, your policy may expire and no benefit is paid.
There are three types of term life insurance:
- Level term life insurance offers you a fixed premium and a fixed death benefit.
- Yearly renewable term life insurance offers you a premium for a year at a time. Your premium will increase as you age, but you may renew your policy without evidence of insurability.
- Decreasing term life insurance offers you a fixed premium with a death benefit that decreases over time.
Regardless of which type of policy you choose, there is no savings component and benefits are paid upon your death.
How much does it cost?
Because you are only purchasing coverage for a specific time, term life insurance is the least expensive of all life insurance options. Premiums are based on the amount of death benefit you purchase and the term of your policy. The insurance company will also consider your age, sex, health and life expectancy.
And, as long as you continue to pay the premiums on time, your policy will remain in force until the end of the term.
What happens at the end of the term?
If you outlive the term of your policy, you will have a few options.
- You may renew the policy for another specific term.
- You may convert the policy to a whole life benefit.
- You may terminate the policy.
Group term life insurance
Nearly 60% of employers offer life insurance coverage to full-time employees (source: Bureau of Labor and Statistics). Most of this coverage is provided in the form of a term life policy.
If you have coverage through your employer, your coverage will last as long as you are employed and pay the premium. The death benefit is either a specific dollar amount of coverage (e.g., $10,000) or a multiple of your salary (e.g., 2x base salary). And, it is often guaranteed issue. That means you cannot be denied coverage if you are not healthy.
If you terminate your employment, you may be offered the option to convert your coverage to an individual policy. In most cases, you will not need to provide proof of good health, but your premiums may increase.
Voluntary group supplemental term life insurance
Your employer may offer supplemental term life insurance that goes beyond your group term life coverage. You pay the full cost of this insurance, which is often elected in increments of $5,000 or $10,000, or as a multiple of your salary.
The plan typically offers a specific amount as guaranteed issue (the amount you may purchase without proof of good health). Any amount above that will require evidence of insurability.
Taxes on term life insurance
If you purchase an individual term life insurance policy outside of work, you are paying the premium with money that has already been taxed. As a result, your beneficiaries generally will not have to pay taxes if they receive a death benefit payment. The same is true if you have a term life policy through your employer.
However, the value of your group and supplemental life insurance may be considered part of your income. If you have less than $50,000 of coverage, you most likely do not have any tax liability. If your coverage is valued at more than $50,000, the IRS will set a fair market value and you may be required to pay taxes on the difference between that value and the premiums you pay for the coverage.
In most cases, if you have less than $50,000 of group and supplemental term life insurance through your employer, you will not have any associated income taxes. Any group term coverage above $50,000 is assigned a fair market value by the IRS. If you pay less in premiums than this fair market value, the difference is considered as part of your income and you would pay taxes on it. Visit the IRS website if you have questions on how the fair market value is calculated.
For more information
If you have questions about how term life insurance can benefit you and your family, talk to your broker or benefits adviser. They can answer your questions, help you determine if this coverage is right for you and figure out how much coverage you may need to purchase.
Remember, life insurance helps protect the ones you love. It ensures they can continue to support themselves financially when you are gone.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.
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