Understand life insurance basics prior to purchasing your first life insurance policy.
In the event of your passing, life insurance coverage protects any people or organizations relying on your income. For this reason, it’s important for you to understand life insurance basics and to familiarize yourself with the various life insurance options available.
The two main types are term life insurance and permanent life insurance. Each type has different policies, with unique features that will appeal to different people.
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Term life insurance
Term life insurance is a standard insurance policy that provides coverage for a specific period of time. This means if you don’t die within the term, your beneficiary doesn’t get the death benefit, and the policy expires. You can select the term that works best for you, and common lengths for term life insurance are 10, 20, or 30 years. One of the challenges for people who purchase term life insurance is deciding how long the policy should last. You may want to have the policy last until you retire or as long as your youngest dependent will need financial support.
Permanent life insurance
Permanent life insurance, as the name implies, provides coverage for your entire life, as long as you continue to pay your premiums. The premium for permanent life insurance is generally more expensive than for term life, but it usually doesn’t increase as you age. Permanent life insurance is also called cash-value insurance and is often considered a financial investment, because part of the premiums you pay are invested by the company that sold you the policy. These investments give you a tax-sheltered way to earn money.
Permanent life insurance policies have a face value and a cash value. The face value is the amount your beneficiaries receive when you die; in other words, the death benefit. The cash value is equal to the amount of premiums you have paid, plus any investment earnings. Some permanent life insurance policies guarantee growth for the cash value. Others involve more risk, which means the cash value of your policy could potentially decrease over time.
One advantage of permanent life insurance is that you don’t pay any interest on your investment earnings, and your beneficiaries don’t pay any tax on the death benefit when it is eventually paid out. In some circumstances, you can even borrow money tax free from your permanent life policy.
There are four types of permanent life insurance: whole life, universal life, variable life, and variable universal.
To help find the right life insurance plan for you, visit our Life Insurance page.