There are many types of life insurance for real estate, each with its own variations and complexities. Here, we’ll focus on the two primary categories and when each may be appropriate for commercial real estate professionals.
Term Life Insurance
Term life insurance is typically the most affordable option because the insurer covers you only for a specific period—the term—rather than for your entire life. Common terms include 10, 20, or 30 years. You pay the same premium every year during the term. At the end of the term, the policy terminates and you are no longer insured. If you still need life insurance, you must buy a new policy, or some insurers allow you to renew the existing policy at the then-current rate.
Term insurance is often a good fit when your need for coverage is temporary. For example, if you have young children and expect your financial responsibilities to decrease once they’re independent, a 20‑ or 25‑year term policy may be appropriate.
However, life doesn’t always follow the plan. Sometimes plans change—like having a third child 16 years after your second child. Also, during those 16 years, you may develop medical conditions that make new coverage expensive—or unavailable. Term insurance is useful, but it requires thoughtful planning.
Whole Life Insurance
Whole life insurance covers you for your entire life (assuming you continue to pay the premiums). When you die, your insurer will pay a benefit to your beneficiary.
With whole life insurance, you don’t have to worry about changing plans or picking up a medical diagnosis because you don’t have to worry about renewing your policy. However, whole life insurance is more expensive than term life insurance because insurers have a 100% chance of having to pay the benefit, as long as you pay premiums for your entire life.
Whole life insurance can use useful when you need to secure assets after your death, or if you want to ensure that you leave a certainty legacy to your heirs. It can also be useful as a method of charitable giving, where the charity you support is the beneficiary of your life insurance policy and receives a “donation” when you die.
Employer-Provided Life Insurance
Many W‑2 employees receive life insurance as part of their benefits package. If you’re employed by a company, here are four important considerations:
- Most employer policies are term policies. They cover you only while you are employed by that company, not for your entire life. Some of these plans are portable (i.e., you can continue them after you leave your employer), but you will have to pay the full cost going forward.
- If you enroll in the insurance program when it is first offered to you, you generally do not have to go through underwriting—coverage is automatic. However, if you wait to enroll, you may have to go through underwriting, and coverage is not automatic. For example, if you enroll in the program when you start working for the employer, no problem. But if you don’t enroll at the beginning and then decide two years later that you want to enroll (or increase your coverage), you may have to go through underwriting and could be denied coverage.
- Some employers may allow you to add coverage. Many employers provide a basic level of coverage (often equal to your annual salary) at no cost to you and allow you to increase the level of coverage by paying an additional premium. Also, some employers allow you to add coverage for your spouse.
- Coverage over $50,000 is taxable. The value above that threshold is treated as imputed income and increases your federal withholding.
You Can Have More Than One Life Insurance Policy
Even though there are different types of life insurance policies to choose from, it’s important to remember that you can have multiple life insurance policies. As your needs change, you can add, remove, and replace coverage. Just remember that your age, occupation, and health will factor into the insurance that you can qualify for, as well as the cost of that insurance.
Next Up: How Much Life Insurance Do You Need?
In our previous post, we covered the basic reasons commercial real estate professionals need life insurance. In our next post, we discuss how to determine how much life insurance you need.
At Dominion Financial Advisors, we do not sell life insurance. As part of our comprehensive financial planning process, we perform a life insurance needs analysis to determine which types of insurance are suited to your situation. As fiduciary financial advisors, we don’t receive any commissions, referral fees, or kickbacks for life insurance. Our only goal is to provide the best advice we can offer.