Americans are more likely to have employer-sponsored life insurance coverage than to own their own life insurance policies.¹ Unfortunately, the major problem with employer-sponsored group insurance is that you usually lose coverage after you leave your job or retire (unless the policy is portable).

Owning your own life insurance policy is one way to help keep your family protected, regardless of whether your employment situation changes. Fortunately, owning your own policy may offer some other attractive benefits as well.

Term Policies

Individual term life insurance policies remain in effect for a specific period and pay a death benefit if the insured dies within that term. The death benefit paid to beneficiaries is generally not taxable as income. Term policies do not accumulate cash value and have no residual value if allowed to lapse.

Permanent Policies

Like term policies, the death benefit from a permanent policy is generally income tax–free. But unlike term policies, certain types of permanent life insurance policies remain in force throughout the insured’s lifetime as long as the premiums are paid.

Permanent insurance not only provides a death benefit, it also offers a living benefit. Part of each premium goes into a cash-reserve account that accumulates earnings on a tax-deferred basis. Once you have built up significant cash value, you can access it for any purpose, such as college tuition for your loved ones or retirement income. Because you have already paid income taxes on the funds used to pay the premiums, that portion of the cash value will not be taxed (any interest withdrawn, however, is taxable). Remember that access to cash value through loans or partial surrenders will reduce the policy’s cash value and death benefit, and it may result in a tax liability if the policy terminates before you pass away.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent on the claims-paying ability of the issuing insurance company. Before you take any specific action, be sure to consult with your tax professional.

1) LIMRA International, 2008

This material was written and prepared by StoneRiver–Emerald.
© 2009 StoneRiver, Inc.