Life Insurance

Ask most people what life insurance is, and they’ll tell you it’s a policy you buy that pays money to your family if you pass away.  There are key policy features and different kinds of policies available.

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What is a life insurance policy, and what are its key
features? 

A life insurance policy is an agreement between an insurance company and a person (or legal entity). Each life insurance policy is different, and each state’s laws regulating insurance policies
are different. In general, most insurance policies identify the following:

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• The insurer: Only certain companies can provide life insurance, and these companies are regulated by state insurance departments. Many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).

• The policyholder: The person or entity (such as a family trust or a business) which owns (or “holds”) the policy. The policy can insure the holder, or it can insure another person.

• The insured: The person whose life is insured.

• The death benefit: The amount the insurer will pay when the insured passes away. 

• The beneficiaries: The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse) or it can be divided by percentage among many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).

• The policy length: The time period that the insurer agrees to pay a death benefit. This can be a specific term (e.g., 10 or 20 years) or it can be permanent – a policy that lasts for the life of the insured for as long as premiums are paid.

• The premium: The monthly or yearly payments needed to keep the policy in effect.

• The cash value: Permanent life policies, like whole life insurance, have a cash value component that builds over time and can be cashed out or borrowed against. A term policy has no cash value.

 

What are the different kinds of life insurance policies

and how do they work? 

 

There are two basic types of life insurance: Term and permanent life insurance.

 

A term life insurance policy provides coverage for a specific period of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because unlike the permanent policy or whole life insurance, there’s no cash value component to the policy – once the term is over, there’s nothing left.

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Permanent life insurance provides coverage that lasts your entire life. Unlike term, it’s not a “pure life insurance” product because it includes a cash value component which helps make coverage last while the insured is alive and premiums are paid, and while providing other financial benefits. A portion of your premium dollars are invested, and your cash value grows tax-deferred over time – but the entire death benefit is immediately payable from the first day you have the policy. The cash value on the other hand, may take some years to build up to a significant amount.

 

Life insurance can be a powerful tool for protecting your financial confidence – and especially the financial confidence of the people who depend on you.