If you are a first responder, every shift, every moment on the job can be risky. Being prepared for the worst, your death, is the best way to protect your family. A quality life insurance policy can protect your family and help them maintain the same lifestyle you are living today in the event of your death. But with so many options out there you must evaluate what is best for you and your family’s situation. Here are common life insurance programs to consider.
Term Life Insurance
Term life insurance is just that. Insurance that is for a specified “term” or length of time. Term life insurance typically comes in terms of 10, 15, 20, 25, or 30 year terms. Here are some key features of term insurance:
- The premiums are locked in for the life of the term. They can not go up during the term. You pay the premium throughout the duration of the term.
- At death the policy pays out the face value of the policy. If it is a $500k face value then your spouse gets a check for $500k.
- At death the face value is paid out tax free as long as you are paying your premiums with after tax (your take home pay) dollars.
This is pure life insurance. In other words, it only protects against your death. Because of this, it is the least expensive form of life insurance you can buy. Premiums are not recoverable so at the end of the term you don’t get any of your money back and there is no built in savings account. But don’t let that scare you. It makes up for it by being the least expensive form of insurance.
Permanent Value Insurance
Another type of life insurance is permanent life insurance, also called cash value. These policies are designed to have a life insurance component (an amount paid to your beneficiary if you die) as well as a savings component that builds up cash value over time. Common names for this type of policy include:
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance and sometimes a combination of all or some of these names
How Does Permanent Value Insurance Work?
Part of your monthly premium payment goes towards the death benefit within the policy and the other part goes into a savings account that earns interest. The interest rates vary based on the policy, but here are some of the average interest percentages:
- Whole life typically earns between 2.6% – 4%
- Universal typically earns an average of 5.4%
- Variable typically earns an average of 7.4%
These policies can be very expensive because you are paying for a life insurance and a savings mechanism. As your cash savings grows you can take out loans against your savings, but this can reduce your death benefit if you die while the loan is outstanding.
These policies are more expensive than a straight level term policy when comparing the same face values. If you do die, your beneficiary gets the death benefit and the cash portion oftentimes gets kept by the insurance company unless you purchase expensive riders to ensure your beneficiary gets both.
Group Term Life Insurance Through Your Workplace
If you are employed then you usually have access to a group term life insurance policy. Some police/fire departments also give their employees 1x, 2x, or 3x your annual salary in life insurance for free. You may also have the option to purchase additional life insurance on top of this. So let’s look at group term life insurance.
In a group policy you are “grouping” all of the employees together to determine the risk and participating in the policy as a group. This means as you get older you provide more risk to the group, so as you age, your premiums usually go up. That’s why when you sign up for annual enrollment you see the tables of how much insurance is based on your age. As long as you stay employed you can keep paying for the policy, but if you leave your employer, that group term policy only stays in effect for 31 days after you leave. You can keep the coverage if you “convert” the policy to a whole life policy. But remember, cash value insurance can be very expensive compared to its equal term counterpart.
What Type of Insurance is Right For You
We recommend the Term life insurance hands down. Why? Well for starters it is the least expensive by far. For example, below are example quotes for a healthy 30-year-old male for $500k in insurance.
Term Life Insurance:
- 20 year term = $21 monthly
- 30 year term = $33 monthly
Whole Life Insurance:
As you can see, a whole life policy is significantly more expensive than term life insurance. Remember, insurance agents are compensated based on the premium costs, so the higher the premium you pay the higher the commissions they make. Common selling points used to promote cash value policies include:
- Why would you buy a term policy and give all your money to an insurance company with nothing to show for it at the end?
- A cash value policy is an investment that you can use to save for retirement.
What I see happen all too often is someone gets sold on one of these cash value policies, but they can’t afford $460 a month so they end up buying a much smaller policy to get their monthly payments down to a more affordable monthly payment. By doing this you are potentially putting your family in a difficult predicament should you die. Let’s say $100 a month buys $100k worth of whole life insurance as an example. Is that $100k death benefit even enough to pay off the house? Maybe, but potentially not, so you have just put your surviving spouse into a situation where they no longer have your paycheck coming in but the monthly expenses are still the same, and maybe even higher (they might have to add child care to go back to work). This can be a bad situation to be in.
You can’t always predict what your future financial, and family, needs may be so always consult with a licensed life insurance agent to fully understand what your life insurance needs may be. Schedule a free 15-minute discovery call with Financial Cop to find out if your life insurance strategy supports your family.
