Life Insurance Overview
Similar to other types of insurance, life insurance helps plan for your loved ones in the event of the incident – in this case, death. 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. Complexities aside, life insurance offers 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. Understanding your insurance coverage needs will help you purchase the right policy for you 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 Premiums can be increased, decreased or deferred, and cash values can be withdrawn.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, review all of the needs in the insurance coverage amount and term to choose the right type of life insurance for your situation. Make sure you understand all of the benefits that you purchasing with your policy.