Life Insurance

What is Life Insurance?

Life insurance is a plan for the unexpected — it offers financial protection to your loved ones by replacing your income if you suddenly die. The beneficiaries of your life insurance policy receive a lump sum that covers bills, everyday expenses, and various anticipated costs — such as medical bills or college tuition.

There are two major types of life insurance — term and whole life. Whole life is sometimes called permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life.

Term Insurance

Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions. There are two basic types of term life insurance policies: level term and decreasing term.

Level term means that the death benefit stays the same throughout the duration of the policy.
Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.

Whole Life / Permanent

Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are four major types of whole life or permanent life insurance—traditional whole life, universal life, variable life and variable universal life, and there are variations within each type.

In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it gets very high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. The company keeps the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims. They invest that money, and then use it to supplement the level premium to help pay the cost of life insurance for older people.

By law, when these “overpayments” reach a certain amount, they must be available to the policyholder as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy.