Life Insurance 101

Most insurance policies provide a “just in case” umbrella.  For example, car and healthcare insurance are based on offering financial relief from the potential of an auto accident and illness, respectively.  There are good chances that these events do not occur and, if they do, there are good chances that they will not be serious.  The chances of events occurring and the different severities of such events are all factored into the premiums you pay and coverage you receive.  However, just because you have auto, healthcare, home, and other insurance policies, do not assume that you are already knowledgeable about life insurance.

Life insurance is completely different in that it is based on “when”, and not “if” occurrence, thus making life insurance products more complex.  This fundamental difference is what makes life insurance more like a financial product and why more life insurance consumers are exploited as compared to other insurance categories.

Complexities aside, life insurance offers you peace of mind regarding the financial future of those that depend on you, and can be a part of your overall legacy.  Benefits can range from covering funeral costs to paying for higher education for your children and mortgages.  Knowing the facts will help you to purchase the right policy for your and your loved ones’ specific needs.  Here are some basic life insurance terms and definitions:

  • Premiums - Monthly, quarterly, or yearly payments required to maintain coverage
  • Face Value - The original death benefit amount
  • Convertibility - Option to convert from one type of policy (term) to another (whole life)
  • Cash Value - The savings portion of a policy that can be borrowed against or cashed in
  • Beneficiary - The individual(s) or entity (e.g., trust) that is designated as benefit recipient
  • Paid Up - A policy requiring no further premium payments due to prepayment or earnings

Basic insurance types include:

Term Life Insurance (Temporary) - the most basic, and generally least expensive form of life insurance for people under age 50.  Term Life Insurance provides for life insurance coverage for a specified term of years for a specified premium.

Declining Balance Term - Variation on term insurance, often used as mortgage insurance since it can be written to match the amortization of your mortgage principal.  While the premium stays constant over the term, the face value steadily declines.  Once the mortgage is paid off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value.

Whole Life - Combines permanent protection with a savings component.  As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate, with some accruing as cash value.

Universal Life - Similar to whole life with the added benefit of potential earnings on the savings component.  Universal life policies are also flexible in regard to premiums and face value. Premiums can be increased, decreased or deferred, and cash values can be withdrawn.  You may also have the option to change face values.

Variable Life - Offers fixed premiums and control over the policy's cash value.  The cash value is invested in a choice of stock, bond, or money market funding options.  Cash values and death benefits can fluctuate based on the performance of the investment choices. Capital gains and other investment earnings accrue tax deferred as long as the funds remain invested in the insurance contract.

Universal Variable Life - The most aggressive type of policy. Like variable life, you decide the investment in mutual funds, though there are no guarantees on these policies beyond the original face value death benefit.

If you are considering purchasing a life insurance policy, you owe it to yourself and to your loved ones to get the facts and choose the right type of life insurance for your situation.  Make sure you understand all of the benefits that you purchasing with your policy.

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