Life Insurance 101
Life insurance is a contract binding a life insurance carrier to compensate a beneficiary for the death of a person insured. If the individual who was insured dies, then the company will provide a payment to the individual’s beneficiary. Life insurance is used to protect the economic value of a human life with regards to those who may be financially dependent upon it.
There are many types of life insurance, but it is important to carefully evaluate your individual needs—and the needs of your family—prior to selecting any life insurance policy. Here is a brief overview of some of the most common life insurance types:
- Term life insurance – life insurance protection for a specified period of time. A death benefit is paid to the beneficiary if the insured dies within a specified period of time while the policy is still in force. Additionally, many term life plans can be converted to permanent life insurance without evidence of insurability. Finally, term life insurance is typically cheaper—on a monthly payment basis—then permanent life insurance.
- Whole life insurance – permanent life insurance and protection for life. As long as premiums are paid, a death benefit is paid to the beneficiary. The premiums for whole life insurance policies are designed to remain level over time. In addition, these policies accumulate cash values on a tax-deferred basis.
- Universal life insurance – permanent life insurance. Like whole life insurance, as long as premiums are paid, a death benefit is paid to the beneficiary. These policies are different from whole life insurance policies because they offer the policy owner some flexibility to change the premium payments and death benefit. The death benefit may be increased subject to insurability or decreased, and the premiums can also be increased and decreased as well as skipped.
- Variable life insurance – permanent life insurance and provides protection for life. Like whole and universal life insurance, a death benefit is paid to the beneficiary as long as premiums are paid. The premiums for variable life insurance policies are designed to remain level over time. In addition, these policies accumulate cash values on a tax-deferred basis with the potential for higher rates of return than traditional whole life policies.