.png)
Life insurance provides invaluable protection for your family in the event of your death. It ensures the people you care about can keep supporting themselves financially when you're gone. Yet many Michigan families either lack life insurance coverage altogether or carry far less than they'd actually need.
This guide breaks down how life insurance works, the three basic types, and how to figure out how much coverage your family needs — so you can walk into a conversation with your agent already knowing the right questions to ask.
What Is Life Insurance?
Life insurance pays a specific sum of money, called the death benefit, upon the death of the insured person. That money is paid directly to the beneficiary or beneficiaries named on the policy. There are three basic types of life insurance: term life, whole life and universal life.
How you purchase coverage is up to you. Many employers offer group life insurance to full-time employees, but you can also buy individual life insurance separate from (or in addition to) any employer-sponsored benefit, including coverage for your dependents.
What Is Term Life Insurance?
Term life insurance is usually the simplest and most affordable option. It covers you for a specific number of years — most commonly 10, 20 or 30 — and if you die within that term, your beneficiary receives the full death benefit.
For example, say you purchase a $1 million term life policy with 20 years of coverage. If you die during year 17, your beneficiary receives the full $1 million. If you outlive the 20-year term, the policy simply expires and no benefit is paid.
There are three types of term life insurance:
- Level-term life insurance offers you a fixed premium and a fixed death benefit.
- Yearly renewable term life insurance offers you a premium for a year at a time. Your premium will increase as you age, but you may renew your policy without evidence of insurability.
- Decreasing term life insurance offers you a fixed premium with a death benefit that decreases over time.
Regardless of type, term life has no savings or cash-value component — it's pure protection, which is exactly why it costs less than permanent coverage.
How Much Does Term Life Insurance Cost?
Because you're only buying coverage for a set period, term life is the least expensive life insurance option. Premiums are based on your death benefit amount and policy length, along with your current age, sex, health and life expectancy. Your policy stays active for the full term as long as you keep paying premiums on time.
What Happens When My Term Ends?
If you outlive your policy's term, you generally have three options: renew the policy for another term, convert it to a whole life policy, or let it terminate.
How Does Group Term Life Insurance Through My Employer Work?
Most employer-sponsored life insurance is a group term policy. It lasts as long as you're employed and premiums are paid, and the death benefit is either a flat dollar amount (say, $10,000) or a multiple of your salary. It's often guaranteed issue, meaning you can't be denied coverage for health reasons. If you leave your job, you may be able to convert the coverage to an individual policy, usually without proving good health — though your premium will likely increase.
Many employers also offer voluntary supplemental term life on top of your group coverage, which you pay for yourself, typically in $5,000 or $10,000 increments or as a multiple of salary. A portion is usually guaranteed issue; anything above that requires evidence of insurability.
Is Term Life Insurance Taxable?
If you buy an individual term policy outside of work, you're paying premiums with already-taxed money, so your beneficiaries generally won't owe taxes on the death benefit. The same is true of employer-provided term life — up to a point. If your group and supplemental coverage totals less than $50,000, you typically have no associated income tax. Coverage above $50,000 is assigned a fair market value by the IRS, and if your premiums are less than that value, the difference counts as taxable income. Check the IRS website or a tax adviser if you have questions specific to your coverage.
What Is Whole Life Insurance?
Whole, or permanent, life insurance guarantees a death benefit and is designed to cover you for your entire life as long as required premiums are paid. Unlike term life, whole life builds cash value: a portion of each premium goes toward the policy's cash value, which grows according to the policy's terms — sometimes including guaranteed growth or dividends. That cash value grows tax-deferred, meaning you only pay taxes on it when you withdraw.
Some policies pay dividends, which you can take as cash or reinvest to help pay premiums, repay loans or increase your death benefit.
How Much Does Whole Life Insurance Cost?
Because it builds cash value, whole life costs more than term life. Premiums are based on your death benefit, age, sex, health and life expectancy, and your policy stays in force as long as premiums are paid on time.
Can I Borrow Against a Whole Life Policy?
Yes. One of the advantages of whole life is that you can borrow against its cash value, generally with no restrictions on how you use the money — you just repay the loan with interest. If you don't repay it, the outstanding balance reduces your policy's final payout.
Is Whole Life Insurance Taxable?
Whole life death benefits are usually not taxable to the beneficiary. Exceptions include taking an early payout on cash value above what you've paid in premiums, certain withdrawals, dividends or policy surrenders, and unpaid loan balances treated as taxable gains. Talk to a tax adviser about your specific situation, or visit the IRS website.
What Is Universal Life Insurance?
Universal life insurance is another form of permanent coverage, combining a death benefit with a cash-value component and flexible premiums. These hybrid policies let you build savings over time while giving you control over how that cash value is managed. You can deposit more than the required premium to grow savings faster, use investment earnings to cover premiums and administrative costs, add earnings to your death benefit, borrow against the cash value, or withdraw savings for a major expense like a down payment or college tuition — as long as enough remains in the account to cover the monthly premium.
Indexed universal life insurance credits interest based on the performance of a market index, subject to policy caps and participation rates. It's often considered less risky than traditional universal life because it offers some protection against direct market losses while still providing growth potential.
Universal life benefits are taxed under largely the same rules as whole life: generally tax-free to the beneficiary, with exceptions for early cash-value payouts, certain withdrawals and unpaid loans. A tax adviser or the IRS website can walk you through your specific situation.
What Is Dependent Life Insurance?
Dependent life insurance covers your spouse or domestic partner and your children, and you're automatically the beneficiary. If you already have an individual policy, your insurer may offer a rider covering your spouse, your children or both — spousal premiums run higher than premiums for kids, and some insurers require evidence of insurability for your family's general health.
Through an employer, spousal coverage is typically 50–100% of your own covered amount, with children covered at a flat dollar amount, and you may need to show proof of good health for your spouse. Tax treatment depends on who pays the premium and how much coverage is provided — check with your employer or tax adviser.
What Is Evidence of Insurability?
Some insurers require proof of good health, known as evidence of insurability, before issuing a policy. This is more likely if you're applying for a high death benefit, have a medical or family medical history that signals risk, travel frequently to high-risk areas, take part in dangerous hobbies like skydiving or race car driving, or have other risk factors such as a poor driving record.
The insurer may request medical records or send a nurse to check your cholesterol, blood sugar, blood pressure and thyroid function, and may also review your credit history, business credit (if you own a business) and criminal background. Coverage becomes effective once your evidence of insurability is approved.
How Do I Choose a Life Insurance Beneficiary?
Naming a beneficiary — or beneficiaries — is one of the most important steps in buying a policy. You can leave the full death benefit to one person or split it among several; if you name more than one and don't specify percentages, the benefit is divided equally. You'll also want to name a secondary (contingent) beneficiary who inherits the benefit if your primary beneficiary has already passed.
Provide as much identifying information as possible — names, addresses, even Social Security numbers — so the administrator can locate everyone easily. And review your beneficiary designations regularly, especially after marriage, divorce, the birth of a child or the death of a named beneficiary. Beneficiary designations generally override instructions in a will, so keeping them current matters.
What Isn't Covered by Life Insurance?
Most policies exclude benefits for war and acts of war, and for suicide or self-inflicted injury (including misuse of poison, chemicals or drugs outside a physician's direction). Many policies also carry an aviation exclusion for deaths in a privately owned aircraft — not commercial flights — and some limit coverage for dangerous activities like auto racing, rock climbing or hang gliding, though you may be able to add coverage for a higher premium. Always check your specific policy for its exclusions.
What Riders Can I Add to a Life Insurance Policy?
Common riders include early access to your death benefit if you're diagnosed as terminally ill, accidental death benefits (also called double indemnity), and coverage for dependents. Some policies also offer a disability rider, which waives your premium if you become totally disabled.
How Much Life Insurance Do I Need?
The right amount of coverage depends on how you answer a few questions. Start with who relies on you financially: Are you married, and does your spouse have independent income? Do you have children, and when will they be financially independent?
Then look at your finances: How much debt do you carry, and is it growing or shrinking? What do you spend and save each month, including retirement savings?
If you're leaning toward term life, calculate the income your family would need to replace and how many years you want the policy to cover expenses like your mortgage or your kids' college education. If you're leaning toward whole or universal life, think about funeral and medical expenses, provisions for a child with special needs, and estate taxes.
Whatever you choose, factor in inflation. $100,000 today won't have the same buying power in 25 years, so build in some cushion for rising costs down the road.
Which Type of Life Insurance Is Right for Me?
There's no one-size-fits-all answer. With term life, you can often lock in a low premium if you buy individual coverage while young and healthy — sometimes cheaper than what your employer offers — though group coverage may be the better route if you're having trouble qualifying for individual coverage. If you want to leave a legacy and build cash value along the way, whole life offers a guaranteed death benefit for your entire life. And if you want the flexibility to adjust premiums and investment strategy as your situation changes, universal life may fit best — though it may not make sense if you're purchasing it later in life.
What Is Accidental Death and Dismemberment (AD&D) Insurance?
AD&D insurance only pays out if you're killed or injured in an accident. It can stand alone or be combined with life insurance. The accidental death benefit is usually a flat dollar amount or, through an employer, a multiple of salary; the dismemberment portion varies by injury type — for example, you might receive the full benefit for blindness but only 25% for the loss of a finger. Check your policy for the exact payout schedule.
AD&D typically excludes accidents from high-risk activities like skydiving or car racing, and doesn't cover deaths or injuries from drug overdoses, driving while intoxicated, surgical complications or mental illness.
How Do Life Insurance and AD&D Work Together?
Many employer life policies include AD&D at the same benefit level. For example, a $10,000 term life policy with matching AD&D would pay $10,000 for a natural death, or $20,000 ($10,000 life plus $10,000 AD&D) for an accidental death. Other group policies let you buy AD&D separately: with $50,000 in life insurance and $25,000 in stand-alone AD&D, a natural death pays $50,000, while an accidental death pays $75,000. If you're injured rather than killed, you receive the AD&D payout (for example, 75% of the policy for losing a leg) while your life insurance stays intact.
If your employer offers AD&D at no extra cost, it's generally worth accepting. If you're weighing a stand-alone policy, consider your lifestyle — frequent four-wheeling, hunting or other higher-risk activities make the extra layer of protection more valuable, though accidents can happen to anyone.
Key Takeaways
- Term life provides individual coverage for a specific number of years. The most common terms are 10, 20 and 30 years. If you die within the term of the policy, your beneficiary will receive the full death benefit.
- Whole life provides a guaranteed death benefit, covers you for your entire life and pays the face value up to the maximum age.
- Universal life enables you to build savings over time and offers the flexibility to invest your savings and earn cash value on the policy.
- Accidental death and dismemberment pays benefits if you are killed or injured in an accident. It can be npurchased on its own or combined with your life insurance policy.
Frequently Asked Questions About Life Insurance
Do I need life insurance if I don't have kids?
If anyone depends on your income — a spouse, a partner, an aging parent — or if you'd leave behind debt or funeral expenses, life insurance is still worth considering even without children.
Is employer-provided life insurance enough?
Often not. Group policies are usually a flat amount or a small multiple of salary, which may fall well short of what your family would need to replace years of income and cover a mortgage or education costs.
Can I have both term and whole life insurance?
Yes. Many people layer a larger term policy for their highest-need years (like while raising kids or paying off a mortgage) with a smaller permanent policy for lifelong needs like funeral costs or legacy planning.
How do I know how much coverage to buy?
Start with your income, debts and how many years your family would need support, then add in future costs like college. A local, independent agent can help you run the numbers against your actual budget.
Talk to a Local Agent About Your Life Insurance Options
Choosing between term, whole and universal life insurance — and figuring out how much coverage actually fits your family's needs — is easier with a local agent in your corner. As an independent agency, Top O' Michigan Insurance Solutions can shop your life insurance options across multiple carriers to find the right fit and the right price, instead of selling you just one company's product.
Call us at 800-686-8664 or request a quote online to talk through your options. You can also visit our Insurance 101 page for more coverage basics.
This article is for informational purposes only and is not professional, financial, medical or legal advice. Coverage is subject to underwriting, and nothing is bound until confirmed by an authorized representative of Top O' Michigan Insurance Solutions.