01Why Coverage Through Work Usually Isn’t Enough
Many people assume the life insurance they get through their employer has them covered. In most cases, it doesn’t. Employer-sponsored policies commonly pay just one or two times your annual salary, a fraction of what a family typically needs to replace years of lost income. Simply consider that, for example, a public university like Penn State currently costs about $38,000/yr for tuition, room and board. A private university or college may be twice that or more. With tuition inflation running higher than inflation in the broader economy, a 4 year old child today will require a substantial amount in 14 years. And that coverage is tied to your job. If you leave, get laid off, change employers or retire, it usually ends or must be converted to an individual policy, often at a much higher cost. Owning your own policy means your protection stays with you no matter where you work.
02The Human Life Value Concept
Your most valuable financial asset usually isn’t your house or your retirement account. It’s your ability to earn an income over the rest of your working life. Human life value is a way of putting a dollar figure on that. It estimates the future income your family would lose if you were no longer here, expressed in today’s dollars.
Sarah is 40 and earns $90,000 a year. She plans to work until 65, so she has 25 earning years ahead.
- 1.Start with what she contributes. After her own personal expenses, about $67,500 a year of Sarah’s income goes toward supporting her family.
- 2.Account for raises. Her pay is assumed to grow about 3% a year.
- 3.Bring it into today’s dollars. A lump sum paid today can be invested. So we discount those future earnings at an assumed 5% rate of return.
- 4.Add it up. Over 25 years, Sarah’s future contribution to her family is worth roughly $1.3 million in today’s dollars.
That figure is a starting point, not a final answer. Existing savings, other coverage and your family’s specific goals all shape the right amount. Still, many people are surprised by how far it is from the coverage they currently have.
03Term Life Insurance
Term insurance covers you for a set period, typically 10, 20 or 30 years. If you die during that term, your beneficiaries receive the death benefit. If the term ends while you’re living, the coverage ends. Term is the most affordable way to buy a large amount of protection. It’s often the right fit for needs that have an end date, like raising children or paying off a mortgage.
04Permanent Life Insurance
Permanent insurance is designed to last your entire life, as long as the policy is kept in force. It costs more than term, but it covers needs that don’t expire, such as:
- Final expenses and the costs of settling an estate
- Estate taxes or debts that would otherwise fall to your heirs
- Lifelong support for a dependent with special needs
- Income for a surviving spouse, especially if a pension would shrink or stop
- An inheritance for children or grandchildren, or a gift to a charity you care about
- Funding a business succession plan
Common types of permanent insurance include:
- Whole Life: Fixed premiums, a guaranteed death benefit and cash value that grows on a guaranteed basis. It combines lifelong protection with steady, guaranteed savings.
- IUL (Indexed Universal Life): Flexible premiums and cash value growth tied in part to the performance of a market index, with protection against market losses. It suits people who want growth potential along with lifelong coverage.
- GUL (Guaranteed Universal Life): Lifelong coverage with little cash value, built mainly to provide a guaranteed death benefit at a lower cost than other permanent options.
Beyond the Death Benefit
A permanent death benefit is the main reason people buy permanent coverage, but it isn’t the only one. Permanent policies can also play a role in:
- Tax planning: Cash value grows tax-deferred. Policyholders can typically access it through loans and withdrawals, and death benefits are generally paid to beneficiaries free of income tax. This makes permanent insurance a useful complement to retirement accounts and other savings.
- Liquidity: Many families hold their wealth in assets that are hard to sell quickly, like a business, real estate or retirement accounts. A death benefit provides cash right when it’s needed, to pay estate taxes, settle debts or equalize an inheritance, without forcing heirs to sell those assets at the wrong time. While you’re living, cash value can also serve as a ready source of funds for emergencies or opportunities.
05For Business Owners
A business often depends on a few key people. Life insurance can fund a buy-sell agreement, giving surviving partners the money to purchase a deceased owner’s share. It can also provide key person coverage that helps the business absorb the loss of someone critical to its success. Business owners also use life insurance in executive bonus and compensation plans. These plans reward and retain top employees with valuable benefits, which can include supplemental retirement income funded through permanent policies.