A recent LIMRA study shows less than 50 percent of Americans maintaining individual life insurance policies, a 50-year low. One reason for this may be that many workers receive coverage under employer-provided group policies. Despite the prevalence of this particular employee benefit, obtaining an individual policy is always prudent, particularly considering uncertainties in the employment market. Individual policies offer insulation from the risk of employment termination, protecting benefits that accrue to survivors in case of an unforeseen event.
Individual life insurance policies come in two primary types: term and permanent. Each of these presents specific benefits and drawbacks that warrant careful consideration. As its name suggests, term life insurance covers a specific time period, within which the death benefit is in force. Terms can extend up to 30 years and typically involve a lower premium than permanent life insurance, particularly at the beginning of the term. Some term insurance plans feature fixed payment schedules that never vary, while others feature annual premium adjustments. Flexible term life insurance plans may allow extensions at higher premium rates or conversion into permanent policies within the plan’s term. Insurers generally make the latter option subject to conditions related to policyholder age and policy minimum.
Permanent life insurance plans do not expire and guarantee specific death benefits as long as the policyholder pays the premiums as agreed. The higher payments required by this plan type are mitigated by the fact that premiums typically remain constant throughout the policyholder’s lifetime. The insurer sets aside a percentage of each premium payment in a tax-deferred, cash-value account, which accumulates at a guaranteed rate while the policy is in force. Policyholders may make withdrawals and loans from this accumulated cash value tax-free (up to certain amounts and with certain conditions).
For many retirees facing unforeseen life situations, the ability to withdraw insurance funds while still alive provides a valuable safety net. Loans and withdrawals from a permanent life insurance policy lower the policy’s remaining cash value and death benefit. Availability and cost of an individual life insurance plan depends on age, health, and the amount and term of the plan. For many of the insured, the policies provide a way of looking after family in case of the unexpected. I suggest discussing any life insurance plan thoroughly with a trusted financial advisor prior to purchase.
About the Author:
Darcy Bergen serves as President of Clear Solutions for Seniors, a financial advisory firm headquartered in Arizona.