What is Life Insurance?
Life insurance is a type of coverage that covers the life of the insured. When the insured dies, the insurance company will pay a death benefit to the beneficiaries of the insured. There are usually three parties involved in a life insurance policy. The policyholder, the insurance company, and the beneficiaries.
The policyholder is the one who owns the life insurance policy and pays the premiums. In most cases, the policyholder is also the insured. In some cases the policyholder and the insured are different people, like when a parent purchases life insurance for their child.
The insurance company is the one who will pay out the death benefit in the event that the insured dies. The insurance company requires that premiums are paid throughout the policy in order for them to pay a death benefit.
The beneficiaries are the ones that the insurance company pays the death benefit out to. For example, a parent might list their children as beneficiaries. When the parent (policyholder) passes away the insurance company will pay the death benefit of the life insurance policy to the children (beneficiaries).
Types of Life Insurance
The two most common types of life insurance are term and whole life. They both have their own distinct features and are usually intended for specific purposes based on the needs of the insured. When considering life insurance, assessing your current life and financial situation is important to know what coverage is right for you. If you are financially stable and looking for a long-term financial planning tool, then a whole life policy might be the right option for you. If you have children, you’re a homeowner, or might have other things going on in life that may result in fluctuating financial requirements, then a term life policy might be a better option.
Understand what type of needs life insurance can fill for you or your family
Life Insurance Types
- Term Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- Indexed Universal Life Insurance
Reasons to Consider Life Insurance
- Protection against outstanding debt
- Replacement of income from spouse
- Supplemental Retirement Income
- College Funding for Children or Grandchildren
- Funeral Expenses
- Unexpected Medical Expenses
Differences Between Whole and Term
While whole life and term life share similarities, there are key differences between the two that may make one or another a better option at your current stage in life. Here we will explore the key differences and see who may benefit from each.
Coverage Duration
Term Life
Term life is for a specific period of time. This is usually something like 10, 20, or 30 years. If the insured dies during the policy period, then the death benefit will be paid out to the beneficiaries. If the policy term expires and the insured is still alive then no death benefits will be paid. When purchasing term life insurance there are options available that are called riders. Riders can add or change coverage and add a layer of customization to the policy. A common rider is the return of premium rider. This means that if the insured outlives their term policy, they will get back the premiums they have paid into the policy over time. There are multiple other riders available, so be sure to ask your agent about what options you have to customize coverage.
Whole Life
Whole life insurance provides coverage for the rest of the insureds life as long as premiums are paid. There is a guaranteed death benefit that will pay out to the beneficiaries when the insured dies. This death benefit is usually not subject to income tax so it can be a beneficial tool for those wanting to leave something behind for their family when they pass away.
Premiums
Term Life
Generally speaking, term life insurance is cheaper than whole life due to coverage only being for a specified time. Initial premiums are typically cheaper for the same amount of coverage, but rates can increase if the policy is renewed or converted over to a new term after the policy period ends.
Whole Life
A standard whole life insurance policy has a fixed premium that remains the same for the duration of the policy. This can result in higher premiums at the beginning, but as years go by and inflation increases you will be paying comparatively less as the policy matures.
Cash Value
Term Life
There is no savings component included with term life. It’s intended purpose is to pay out a death benefit.
Whole Life
Whole life insurance adds a savings component in addition to the death benefit. A portion of the premium goes towards an account that is similar to a bank account. This account builds cash value over time. After a specified amount of time, you can access this cash value by taking out policy loans or withdrawals. Accessing this cash value is usually not an option until you have had your policy for five or more years depending on the policy, and early withdrawals and loans can come with penalties.
Who is Term Life Insurance For?
When it comes to life insurance, term life is not the best fit for everyone. With that being said, a wide variety of people can benefit from a term policy due to its flexibility. For people who recently bought a home or have children, a term life policy is a good fit. This is because a term policy can serve as mortgage protection. This means that if the homeowner dies during the policy period the policy will cover the cost of the mortgage on the home. Without this protection the family is still liable to pay the mortgage. If the mortgage is not paid the bank will foreclose on the house. In this example, a term life policy allows the family to own the house outright and not have to worry about making mortgage payments or the bank taking it away.
Whole Life Insurance
Whole life is a form of permanent life insurance. As long as premiums are paid, the insured will be covered for the remainder of their life. Whole life policies have a fixed premium meaning that it will stay the same amount for the rest of the insured's life. There is internal cash value that grows at a guaranteed interest rate.
Universal Life Insurance
The unique characteristic of any universal life is flexibility. Consumers can be flexible with their premiums and can under or over-fund their policy. Universal life has an opportunity to grow cash value and collect interest on a tax-deferred basis. Why over-fund? With any UL, your premium goes into two sections; insurance and a cash value. Overfunding gives your policy an opportunity to grow your cash value and capture higher rates of interest. Over time this can be very valuable and a compounding effect can occur. On the other hand, if you’ve paid into a policy for a period of time, you may be able to stop paying premiums altogether, or withdraw cash value to supplement income. It all depends on what your goal is. Much more often than not, universal life is written on a permanent basis.
There are many different options for life insurance and it can be a lot to sort through. Have one of our independent agents help you find a quality company with a product that will fit your needs.
Informational statements regarding insurance coverage are for general description purposes only. These statements do not amend, modify or supplement any insurance policy. Consult the actual policy or your agent for details regarding terms, conditions, coverage, exclusions, products, services and programs which may be available to you. Your eligibility for particular products and services is subject to the final determination of underwriting qualifications and acceptance by the insurance underwriting company providing such products or services. This website does not make any representations that coverage does or does not exist for any particular claim or loss, or type of claim or loss, under any policy. Whether coverage exists or does not exist for any particular claim or loss under any policy depends on the facts and circumstances involved in the claim or loss and all applicable policy wording.