Life insurance is that cushion of comfort keeping you relaxed and your family safe for the inevitable. A life insurance policy is coverage for a specific amount of money you would like to leave behind to your beneficiaries for when you pass away in exchange for monthly, quarterly, or annual premium.
Life insurance is a financial product that pays out a sum of money to your beneficiaries if you die.
There are two types of policies: term and permanent insurance policies.
Life Insurance terms
The insurer: The company or carrier that issues the life insurance policy on the policyholder.
The policyholder: The person or entity (such as a family trust or a business) which owns (or “holds”) the policy. The policy can insure the holder, or it can insure another person.
The insured: The person whose life is insured.
The death benefit: The amount of coverage that will payout to the beneficiary when the insured passes away.
Living Benefit: Benefits that can be used during your living years of the policy such as accessing any cash value or death benefit.
The beneficiaries: The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse) or it can be divided by percentage among many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).
The policy length: The time period that the insurer agrees to pay a death benefit. This can be a specific term (e.g., 10 or 20 years) or it can be permanent – a policy that lasts for the life of the insured for as long as premiums are paid.
The premium: The monthly or yearly payments needed to keep the policy in effect.
The cash value: Permanent life policies, like whole life insurance, have a cash value component that builds over time2 and can be cashed out or borrowed against. A term policy has no cash value.
Term Life versus Permanent Life Insurance Policies
Term life insurance provides protection for a certain period of time, such as 10, 20, 25, or 30 years, and does not include a savings component. Certain riders can be added to term life policies to help provide financial support if the insured is involved in an accident or becomes disabled. However, once the period ends, your coverage ends as well. Because the duration of coverage is shorter term insurance policies are typically less expensive. You have the option of applying for a new term insurance policy or converting your existing term insurance into a permanent life insurance policy.
Permanent life insurance policies are those that cover the insured for their entire life. Permanent life insurance, unlike term insurance, includes living benefits like a cash value component that grows over time and can be used for things like retirement or unexpected expenses. Other advantages include riders, or extensions, such as an accidental death benefit, riders for critical or terminal illnesses, and the return of premiums, among others. Whole life, universal life, indexed universal life, variable life, and variable universal life insurance are types of permanent policies. Because of the living advantages and the guaranteed security for the rest of your life, premiums can be a little more expensive.
Types of permanent policies:
Whole Life: Whole life insurance is the most common type of permanent insurance, and it covers you for the rest of your life as well as your spouse and other beneficiaries for a certain amount of time. This policy has a savings component that accumulates cash value that can be withdrawn or borrowed at any time. You pay the same amount of premiums per month to cover the coast of coverage you apply for.
Universal Life: Universal life insurance also has a cash savings component that can give you the option of choosing how your cash is accumulated. It also offers a lot of flexible by offering to change your premium or coverage amount.
Indexed Universal Life: An indeed universal life is a popular option for those who like their cash value to grow based on the performance of the indexed market. This type of savings vehicle offers a crediting strategy typically tide to the S&P 500.
Variable Life: Variable life insurance has a great potential for cash accumulation with the ability for the insured to chose from a wide variety of investment accounts.
Variable Universal Life: Variable Universal Life is a combination that allows for more cash growth with a wide variety of investment options. The premiums and death benefit are flexible.
Who qualifies for life insurance?
Because life insurance has its own set of requirements, not everyone will be eligible for coverage. To determine your candidacy for life insurance policies, life insurance firms look at your age, health, hobbies, family's health history, occupation, tobacco usage, amount of coverage, and type of policy. The younger and healthier you are, the cheaper your premiums will be.
Which life insurance policy should you apply for?
The type of life insurance policy you should apply for is determined by your family's current and future financial status. Life insurance isn't just for covering the costs of your funeral. It is a means to leave a financial legacy for your future self or family when the ability for your hard-earned money has ceased.
Choosing the right life insurance coverage is imperative, as well as making sure it meets your unique needs.
Consider if you have children or expect to have children in the future, how much you want to save for retirement, and how much you need to spend on burial expenses. If you're not sure which policy to apply for, contact one of our financial experts for a free consultation and quotes from one of our top companies.