Life Insurance 101

What is Life Insurance?

What is Life Insurance?

Life insurance is a contract between an insurance company and an individual.  The individual pays premiums and, after the individual dies, the insurer disburses a payment called a death benefit to the designated beneficiary. 

Life insurance is usually based on the needs of the policy owner, and there are different types of coverages.  Term life provides protection for a set period of time.  Permanent insurance, usually whole and universal life, offers coverage for the lifetime of the individual.  All proceeds from the death benefits are tax free.

Life insurance is offered in several types:

E

Term Life

This is issued for a specific period of time, like 10, 15, 20, or 30 years.  It is generally less expensive than permanent life insurance.  With a traditional term life policy, the premium is fixed for the coverage period.  After that time, there may be an option to continue the coverage, but the premium will most likely be considerably higher than the term premium.  

Term life insurance can meet the needs of your beneficiaries after you have passed.  This can come in the form of lost income or a safety net for mortgage payments or a college fund.  

There is also the option to invest those funds to increase their value and earn income along the way.  It is the option of the beneficiary. 

Just remember that the funds are paid out in a single, lump-sum, not in increments like a salary.

E

Universal Life

This is one of the types called permanent insurance.  It is different from whole life in its flexibility.  Universal life policies offer the option to increase or diminish your premium payments or coverage amounts during your lifetime.  

Typically universal life is part of a comprehensive estate plan that will help preserve the wealth transferred to the named beneficiary(ies).  It is also frequently used as a substitute for regular income when it continues into retirement years.

Some universal life policies are designed to provide both a death benefit and to build cash value, but not all.  Some center on a guaranteed death benefit.

Universal life policies will probably have a higher premium rate than term insurance.

E

Whole Life

This is another permanent life insurance for the lifetime of the insured.  It also will have higher premiums since it is for a longer period.  There is a type of whole life that will be paid in full over a specified time period.  If you enter into a “20 pay whole life” policy when you are 30 years old, you only pay premiums until you are 50 years old.  Then there are no more premiums to be paid.

Unlike term insurance, whole life has a cash value.  This cash value is designed to work like a savings account and will continue to accumulate tax-deferred income.

This is another tool for estate planning to help you provide for beneficiaries.