Each May 2, National Life Insurance Day offers a reminder of the importance of life insurance. It’s a useful message, considering employees often undervalue this investment. Life insurance tends to take a back seat to more immediate financial issues — but the truth is that the sooner your employees get life insurance, the greater value it will have and the less it will cost.
That doesn’t mean that they don’t need to update their policies over time, though. Here’s a look at the different types of life insurance and how the options can change over a lifetime.
What Is Life Insurance?
Life insurance is a type of insurance policy that pays a sum of money, called a death benefit, to named beneficiaries when the policyholder dies. Like any other type of insurance, your employees will pay monthly premiums to keep the policy — the larger the death benefit, the higher the premiums. Other factors, like age and medical history, can also affect the cost of premiums.
Life insurance comes in two major forms: term and lifetime policies. Term life insurance is for a limited period of time, such as 20 years, so the monthly premiums are significantly less than they would be for a policy that lasts a lifetime. The amount of the death benefit typically depends on life circumstances, such as whether enrollees have a spouse and children who will benefit from the policy. Younger people often opt for a less expensive term policy that lasts until their kids get older, but a lifetime policy might actually be the better investment in the long run.
Lifetime policies are especially popular with parents who have special needs children or adults who want to leave a legacy of some sort for their family or a charity. The main lifetime policies are guaranteed universal and whole life. Guaranteed universal policies don’t grow over time, but the premiums also don’t change. Whole life premiums may stop at age 70, but they’re higher than guaranteed life before that. The death benefit with whole life, however, can grow over time. These plans may also allow policyholders to take out a certain amount of money or borrow it as a loan.
Today, some life insurance policies offer even more benefits. They might double as long-term care insurance or provide “living benefits” after certain chronic illnesses are diagnosed. Kiplinger shares the example of a woman who had a debilitating case of Lyme disease. Using her life insurance reduced her death benefit by about $150,000, but it put $50,000 in her pocket to help her get treatment. Ask your broker about the terms of living benefits and chronic illness riders.
Life insurance plans are always evolving and changing. For example, some companies are starting to offer extra benefits for people who use fitness trackers. You can expect more changes in the years to come as technology continues to integrate with insurance.
How Life Insurance Evolves Through Life
As your employees age and move through different stages of life, their life insurance needs will also change. A married employee with multiple children would probably want a much bigger policy than an unmarried employee might, for example. Often, younger employees prefer term life insurance because the policy is just filling a gap until their children are financially independent and they’ve built enough retirement savings to cover the bills if something happens.
The term policy does come with risks, however. If your employees’ children find themselves in student loan debt or if their retirement plans don’t go as expected, they might wish their term lasted longer. Once the term runs out, trying to extend it could mean the difference between paying $360 a year at year 20 and $6,900 a year at year 21, Kiplinger explains. That’s why it’s important to look into extending plans before the term ends. It’s even possible to convert a term plan into a lifetime policy — but that’s more likely within the first 10 to 15 years of the term.
If an employee is still healthy, they might be able to get a new term (or even a new lifetime) policy for relatively low rates. Cash values can be higher and premiums lower if an employee gets a plan before the age of 50. But sometimes a young person can’t afford the premiums of a lifetime plan with a large cash benefit. That’s why some experts recommend layering plans.
Getting a 20-year term at a young age offers employees timely benefits when their income is lower and their family might be growing. Adding a lifetime plan on top of that may deliver a lower death benefit, but it will still provide some help after your employees are more financially stable.
Life insurance needs will shift over time, but the importance of life insurance doesn’t change throughout your employees’ lives. That’s why small businesses should consider adding life insurance as an extra benefit. Covering part of the premium will make for an even more attractive benefits package for potential new hires.
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