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Understanding Life Insurance
Before we get started let's be clear, not every life insurance policy is the same! Before you purchase a policy, make sure you understand what is or isn't covered, what terms apply to your specific policy, and that the insurer fully answers any questions you may have. The information provided below is general guidance only and should not be relied on in connection with any specific policy or insurer.
Common Terms Used in Life Insurance:
A life insurance policy is an agreement between an insurance company and a person. Some standard terms you'll see in a life insurance policy may include:
- The insurer: the insurance company that sells the life insurance policy.
- The policyholder: the person or entity (such as a family trust or a business) who owns 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 or it can be divided by percentage among many different people and entities. It just depends on how the policy was set up.
- The policy length: the period that the insurer agrees to pay a death benefit. This can be a specific term or it can be permanent. A permanent policy lasts for the life of the insured for as long as premiums are paid and a term policy is for a specific period.
- The premium: the 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.
Types of Life Insurance:
There are two basic types of life insurance: term and permanent life insurance. A term life insurance policy provides coverage for a specific period, 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.
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 that helps make coverage last while the insured is alive and premiums are paid while providing other financial benefits. A portion of your premium dollars grows tax-deferred over time – but the entire death benefit is immediately payable from the first day you have the policy. The cash value may take some years to build up to a significant amount.
There are two main types of permanent insurance: whole and universal life. Whole life insurance – the premium remains the same for life, the death benefit is guaranteed, and the cash value grows at a guaranteed rate. Universal life insurance can be less expensive, but the premiums, death benefits, and cash value growth rate can vary, making the policy more complex.
When deciding what life insurance is right for you, again, be sure to read and understand all the terms and conditions and that you're working with a trusted insurance agent. Don't be afraid to shop around for coverage so you can get the right fit for your needs.
Need more information? We have lots of helpful life insurance information on our website, here.