When talking with many employees, they often have questions about how life insurance impacts their 401(k), retirement readiness, and financial planning. Which type of policy should I choose? Should I buy a term life or whole life policy? How much coverage and for how long? What premium level fits my budget? How will my spouse pay the mortgage if I die? Will my children be able to go to college? Will  my spouse have to give up his or her dreams of retirement?

In short, life insurance is a financial resource that can be used to help protect families in case a spouse dies and businesses in case an owner or a key employee dies. It can also help with planning a secure retirement and financial future. It is a contract between a policyholder and an insurance company in which the insurer agrees to pay the contracted amount to the beneficiary or beneficiaries upon the death of the insured.

Life insurance offers much-needed financial security. It can provide:

• Funds to cover final expenses – Proceeds from a life insurance policy can be used to cover funeral expenses, estate-processing fees, outstanding medical bills and other unpaid debts.

• Income during the readjustment period – Surviving family members need time, usually two to three years, to adjust financially to the loss of the insured’s income. The surviving spouse may need to acquire new skills to rejoin the workforce.

• Income for the surviving spouse – Life insurance can provide the surviving spouse financial support for a certain number of years or for life.

• Income for dependent children – Funds from a policy can support a policyholder’s children until they become financially independent. Life insurance also can provide funds for college or private school education costs, or help meet the financial needs of physically or developmentally disabled children.

• Funds to pay off the mortgage – Proceeds from the policy can be used to pay off a mortgage, thereby alleviating some of the financial pressure on the family. Without life insurance, survivors may have to sell assets, such as a home, to pay expenses. With life insurance, the beneficiaries may have the financial resources they need at the time of the insured’s death.

Whole Life vs. Term Life

Term life insurance is the most basic type of life insurance and usually offers an affordable, level premium for a fixed number of years. The insured is covered for a specific term or time frame, such as 10, 15, 20 or 30 years, and benefits are paid only if he or she dies during this time period. If premium payments stop, coverage ceases. Premiums are based on the insured’s age, gender, tobacco use and health, and the coverage amount requested. Premiums on some annually renewable term policies increase with age. Term insurance is typically purchased by people with short-term life insurance needs (usually 20 years or fewer) or by those with longer-term needs who, for budget reasons, need relatively inexpensive coverage. Many term life insurance policies can be converted to permanent policies issued by the same insurance company without providing additional medical information, but the conversion period may be limited. Consequently, it's important to understand the policy options when purchasing a life insurance contract.

Whole life is a type of permanent insurance suitable for an individual who wants guarantees in his or her contract. Whole life contracts guarantee minimum cash values, level premiums and death benefits, as long as premiums are paid on time. Because of the guarantees, for which the insurance company assumes all the risks, whole life carries the highest premium of all types of permanent insurance. This type of policy is also the least flexible. For example, the insured cannot increase his or her coverage within the same contract. All whole life policies are structured to endow, meaning the cash value will equal the policy death benefit at policy maturity, typically at age 95 or 100.

How much life insurance should I buy?

• Multiple of income approach: Calculate seven to 10 times the client’s pretax annual salary.
• Needs approach: Estimate the client’s family expenses and savings needs over time using the acronym LIFE.

When planning your financial future, ensuring you have proper life insurance coverage is important to determining your family is protected in the worst of circumstances. Moreover, the type of life insurance you buy can affect your monthly budget by hundreds of thousands of dollars. Comprehensively planning your finances including your 401(k) contributions can help determine how much life insurance your family may need at any give time.