Life Insurance Guide to Policies and Companies
What Is Life Insurance?
Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.
For the contract to be enforceable, the life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities.
Life insurance is a legally binding contract that pays a death benefit to the policy owner when the insured dies.
For a life insurance policy to remain in force, the policyholder must pay a single premium up front or pay regular premiums over time.
When the insured dies, the policy’s named beneficiaries will receive the policy’s face value, or death benefit.
Term life insurance policies expire after a certain number of years. Permanent life insurance policies remain active until the insured dies, stops paying premiums, or surrenders the policy.
A life insurance policy is only as good as the financial strength of the company that issues it. State guaranty funds may pay claims if the issuer can’t.
Types of Life Insurance
Many different types of life insurance are available to meet all sorts of needs and preferences. Depending on the short- or long-term needs of the person to be insured, the major choice of whether to select temporary or permanent life insurance is important to consider.
Term life insurance
Term life insurance lasts a certain number of years, then ends. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. The best term life insurance policies balance affordability with long-term financial strength.
Decreasing Term Life Insurance—decreasing term is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate.
Convertible Term Life Insurance—convertible term life insurance allows policyholders to convert a term policy to permanent insurance.
Renewable Term Life Insurance—is a yearly renewable term life policy that provides a quote for the year the policy is purchased. Premiums increase annually and is usually the least expensive term insurance in the beginning.
Permanent life insurance
Permanent life insurance stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. It’s typically more expensive than term.
Whole Life: whole life insurance is a type of permanent life insurance that accumulates cash value. Cash value life insurance allows the policyholder to use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums.
Universal Life: A type of permanent life insurance with a cash value component that earns interest, universal life features flexible premiums. Unlike term and whole life, the premiums can be adjusted over time and can be designed with a level death benefit or an increasing death benefit.
Indexed Universal: This is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value component.
Variable Universal: With variable universal life insurance, the policyholder is allowed to invest the policy’s cash value in an available separate account. It also has flexible premiums and can be designed with a level death benefit or an increasing death benefit.
Burial or final expense insurance is a type of permanent life insurance that has a small death benefit. Despite the names, beneficiaries can use the death benefit as they wish.
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