Life Insurance Guide

At its most basic, life insurance is a contract between you and an insurance company. Under the terms of the contract, you make regular premium payments to the company in exchange for a certain dollar amount of coverage. If you pass away while your coverage is in place, the life insurance company will pay out a death benefit to the beneficiaries you designate.

While the death benefit is the primary reason people tend to get life insurance, certain types of policies accumulate cash value, which is money that grows in a tax-advantaged way and is available for you to access throughout your life.

While there are many different types of life insurance, they all fall into two main categories:

While all life insurance policies fall into the two broad categories of temporary insurance (term life insurance) or life insurance that lasts your entire life (permanent life insurance), there are a number of different types of life insurance within these broad categories. Here’s a rundown.

Converting life insurance

When you’re young, a term life insurance policy might be an attractive and affordable option. But as you grow older and your financial priorities change, you may want to add permanent life insurance for its additional benefits. This is where you can use something known as term conversion.

Most term policies include a stipulation that lets you convert some or all of your coverage into a permanent policy within a specified time frame. While you could get a new permanent policy, a term conversion can be easier. That’s because most companies allow you to convert without undergoing another health examination.

The premium for your converted permanent life insurance policy will take your age into account, but not your health status — even if that has changed since you first signed up for term life insurance. This is a key reason to get life insurance when you’re still young.

Some insurance companies offer conversion credits, which will help offset the cost of increased premiums. These credits may help lower your premiums for the first year.

A general rule for life insurance is to get at least 10 times your salary in death benefit. But this is just a starting point, as there’s no one-size-fits-all figure for how much death benefit you need. Let’s face it: Everyone’s situation is different.

So how much life insurance do you need? Well, that can depend on several factors, including these:

1. Your income
2. How many beneficiaries you have
3. How long your beneficiaries might need support
4. Whether you have a mortgage or other debts
5. Any future costs you’re trying to cover (e.g., a child’s future college or wedding costs)
6. Any investments or assets you may have

It’s a good idea to get at least some life insurance protection as soon as you can because the cost of life insurance is based primarily on your age and health. The younger and healthier you are, the less expensive your premium will be. And many insurers allow you to add a benefit at younger ages that gives you the right to buy more insurance without having to take an additional health exam later. Locking in your health status is a key reason to buy life insurance when you’re young.

Then, as your needs change over time, you can update your life insurance along with your financial plan to reflect your new reality

A key benefit of permanent life insurance is the policy’s cash value. The cash value of life insurance grows in a tax-advantaged way and becomes an asset that you can access for anything you wish. Some common ways that policyholders can use cash value include:

When it comes to accessing your cash value, you have three options.

There are pros and cons to each option. When surrendering a portion or all of your policy, you are essentially giving up some or all of your death benefit. That’s why it’s important to use this option only if your heirs no longer need the death benefit.

In addition, when you surrender your policy, you can take out as much as you paid into your policy on a tax-free basis. But when you take out any gains, you will owe ordinary income tax on that amount. When you take a loan against your policy, you won’t owe any tax as long as you repay the loan. But interest will accrue on your borrowed funds — and if the loan grows too large, the company will surrender your policy, which can result in you owing income tax on any growth.

Using life insurance cash value in retirement

When you get to retirement, it’s common to keep a portion of your savings invested. Over the long-term market-based investments tend to outperform other forms of savings. But as we all know, the price of stocks falls from time to time. In retirement, you’ll sell stocks to generate income. During a market downturn, if you have to sell more stocks to generate the same amount of income, you may end up eating away at your retirement nest egg.

That’s where the cash value of life insurance comes in. Because life insurance cash value isn’t tied to the stock market, during a market downturn you can generate income with the cash value of permanent life insurance in retirement. This allows you to wait until the price of your stocks recover before you sell them.

When a company makes a profit, it can pay all or a portion of that profit to its owners. Public companies typically do this by paying dividends to their shareholders, who own the company. If you own stocks or mutual funds, you may be familiar with receiving dividends.

Dividends with a mutual life insurance company are similar. The difference is that with a mutual company (of which Northwestern Mutual is one), there are no shareholders. The company is operated on behalf of its policyowners. When the life insurance company performs better than it expected in a given year, it can choose to pay its policyowners through life insurance dividends.

Here’s how it works: Each year, a life insurance company forecasts how many claims it expects to pay, how much money it will bring in from premiums and investments, and how much it will cost to run the company. If the company performs better than expected, it may issue a dividend. Dividends aren’t guaranteed, but Northwestern Mutual has paid them every year since 1872.

It’s a good idea to review your financial plan and your life insurance coverage at least once a year. But there are some instances when it makes sense to review your coverage right away. Here are six times when buying more insurance coverage may make sense.

Group life insurance through work

If you get a benefits package through work, there’s a chance that your employer offers some form of life insurance through a group plan. Often, these basic plans offer a fixed death benefit at little or no cost to you. While this is a great benefit, the life insurance you get through work may not be enough. Life insurance through work typically comes in two forms:

While life insurance through work can be a great benefit, there are some drawbacks. First, it typically isn’t portable, meaning that if you leave your job, you could suddenly find yourself without coverage. In addition, the cost of group insurance could change over time.

Individual life insurance

Because group coverage through work may not be enough, many people opt to purchase individual life insurance on their own through a financial advisor. Working with someone can be useful because they can help you talk through what costs you would need to cover in the event something happens to you, what level of coverage you may need, and what type of policy makes the most sense for your financial situation.