Alyssa Lane
Life insurance is a real thing. It is a contract between an insurance company and a policyholder, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. The policyholder typically pays a premium, either regularly or as a lump sum. The two basic types of life insurance are term and permanent life insurance. Term life insurance provides coverage for a specific period, while permanent life insurance provides coverage for the entire life of the insured.
| Characteristics | Values |
|---|---|
| Purpose | To provide financial support to beneficiaries after the death of the insured policyholder |
| Contract | Between an insurance company and a policy holder |
| Payment | A sum of money is paid to the beneficiaries when the insured person dies |
| Payment Triggers | Death, terminal illness, critical illness |
| Payment Form | Lump sum or regular payments |
| Policy Types | Term, whole, universal, variable, final expense, mortgage, group, permanent, endowment, accidental death, senior/pre-need, corporate-owned, critical illness, simplified issue, instant, guaranteed, supplemental, survivorship, decreasing term, AD&D, indexed universal |
| Policy Length | Specific term or permanent |
| Premium | Paid regularly or as a lump sum |
| Cash Value | Permanent life policies have a cash value component that can be cashed out or borrowed against |
| Riders | Additional coverage that can be added to a policy, e.g. accidental death benefit, waiver of premium, disability income, accelerated death benefit, long-term care |
What You'll Learn
Term life insurance
There are several types of term life insurance policies, including fixed-term, increasing term, decreasing term, and annual renewable. Fixed-term is the most popular and basic version, with terms lasting 10, 20, or 30 years. Increasing term allows you to scale up the value of your death benefit over time, while decreasing term reduces the premium payments over time. Annual renewable term insurance provides coverage on a yearly basis and must be renewed each year, with premiums typically increasing at each renewal.
When purchasing term life insurance, the insurance company will determine the premium based on the policy's value and factors such as age, gender, and health. In some cases, a medical exam may be required, and the insurance company may inquire about your driving record, smoking status, occupation, and family history, among other things.
If the policyholder passes away during the term, the beneficiary will receive the death benefit. The cash benefit is typically not taxable and can be used by beneficiaries to cover healthcare and funeral costs, consumer debt, mortgage debt, and other expenses. However, beneficiaries are not required to use the insurance proceeds to settle the deceased's debts.
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Whole life insurance
There are several types of whole life insurance policies, categorised based on how premiums are paid. These include level payment, single premium, limited payment, and modified whole life insurance. Whole life insurance policies can also be further distinguished as participating and non-participating plans.
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Universal life insurance
The cash value in a universal life insurance policy can be used in several ways. Policyholders can borrow against the accumulated cash value without tax implications, although interest will be charged on the loan amount. They can also take out a portion of the cash value in the form of partial withdrawals. However, if the cash value is withdrawn or borrowed against, the death benefit will be reduced by the outstanding amount.
There are some risks associated with universal life insurance. If the cash value falls too low and the premiums don't cover the cost of insurance, the policy could lapse. Additionally, returns are not guaranteed, and some withdrawals may be taxed.
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Variable life insurance
The unique feature of variable life insurance is that its cash component can be invested in asset options, mainly mutual funds. The value of your account will depend on the premiums you pay, how your investments perform, and the associated fees and expenses. You can also allocate money toward a fixed account to receive a fixed rate of interest and reduce overall risk. This rate may change annually, but there is typically a guaranteed minimum, such as 3%.
Variable universal life insurance is closely related to variable life insurance. This type of policy allows you to change the amount and frequency of your premium payments, invest through an underlying cash value, and alter your coverage terms.
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Final expense life insurance
Final expense insurance offers fixed premiums that do not change over time, and the cash benefit can be used to cover various end-of-life costs. One of the advantages of this type of insurance is that it does not require a physical exam for approval; instead, applicants answer a few health questions. The coverage remains in place as long as the premiums are paid, and the policy builds cash value over time, which can be used to borrow against or as a non-forfeiture benefit.
Final expense insurance policies typically offer flexible payment options, and the application and approval process is generally quick and easy. Once approved, coverage can begin immediately, and the policy never expires as long as premiums are paid. This type of insurance is an affordable way to ensure that loved ones are not burdened with unexpected costs during a difficult time.
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Frequently asked questions
Life insurance is a contract between an insurance company and a policyholder, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person.
There are two basic types of life insurance: term and permanent life insurance. Term life insurance provides coverage for a specific period, while permanent life insurance provides coverage for the entire life of the insured.
The policyholder pays premiums to the insurer during their lifetime, and in exchange, the insurer guarantees to pay a sum of money to the designated beneficiaries when the insured person dies.
Life insurance is suitable for individuals who have dependents, such as children or a partner who relies on their income. It provides financial support to surviving dependents or beneficiaries after the death of the insured policyholder.
