What is Life Insurance?

Meet Ava. Ava has been through an incident that made her think about purchasing a life insurance policy.   But wait. She knows nothing about life insurance! Let alone what type could be the most suitable option. Stick around till the end of this article if you are like Ava and would like to know more about what life insurance is and what types of life insurance are offered in the US. So, let’s start with the basics, shall we?   

Life insurance is a contract between an insurer and a policy owner.   During the lifetime of the policyholder, they pay premiums in exchange for their beneficiaries to receive a specific sum of money known as the death benefit after they pass away.   Beneficiaries are most commonly the family of the policyholder.   A beneficiary can also be a company.  The policyholder needs to be sincere about their past and current health conditions or they may risk breaching the contract with the insurance company and the beneficiaries losing the right to the death benefit. Other activities that are considered high-risk should also be disclosed. 

Now let’s take a quick look at different types of life insurance policies. There is a variety of options out there depending on the different needs or even preferences of the policyholder.    The biggest choice you need to consider is whether you are interested in temporary or permanent life insurance. Term life lasts for a certain number of years while permanent life insurance covers the entire lifespan of the policyholder.  

In term life, you can choose between  10, 20, or 30 years of coverage.   It’s an affordable option and that’s why people like Term life insurance.  On the other hand, permanent life insurance covers the insured person’s entire life.   That’s assuming that the person does not stop paying the premiums or surrender the policy.    There are many options you can choose from in both types of life insurance.   Term life can be either decreasing,  convertible, or renewable.   Decreasing term life insurance offers decreasing coverage over the life of the policy at a predetermined rate.

Convertible Term Life Insurance provides the option to convert a  term policy to permanent insurance.  Renewable Term Life Insurance is renewed yearly and provides a quote for the year the policy is purchased.  The premiums increase annually.   This option starts as the cheapest option but increases over time.   Now let’s look at the types of permanent life insurance.   You can choose between whole life,   universal life, indexed life, and variable universal life insurance.   Whole life insurance allows you to accumulate cash value.  

This cash value can be used for many purposes including loans, a source of cash or even to pay the policy’s premiums. Similarly, the universal life has a cash value,   but this cash value also earns interest over time.   Flexible premiums that can be adjusted over time are also an extra perk for universal life insurance.  Indexed universal life insurance takes a   similar approach by letting the policyholder earn a fixed or equity-indexed rate of return based on the cash value component.

Finally, the variable universal life insurance allows the policyholder to invest the policy’s cash value in an available separate account.   variable universal life insurance also has flexible premiums like universal life insurance. So, it’s clear that you have a lot of homework to do before making up your mind!