Life Insurance Define: Everything You Need to Know

Life insurance is a contract between an insurer and the policyholder. The policyholder pays a premium and in the event of the policyholder’s death, the insurer pays a lump sum of money, known as the death benefit, to the beneficiary. The primary purpose of life insurance is to provide financial protection for those who depend on the policyholder’s income.

Types of Life Insurance

Life insurance is divided into two categories: term life insurance and permanent life insurance.

Term Life Insurance

Term life insurance provides coverage for a specific period of time, usually 10, 20, or 30 years. If the policyholder dies during the term, the death benefit is paid to the beneficiary. If the policyholder outlives the term, the policy expires and there is no payout. Term life insurance is generally less expensive than permanent life insurance.

There are several types of term life insurance:

Type of Term Life Insurance
Description
Level Term
Premiums and death benefit remain the same for the entire term.
Decreasing Term
Death benefit decreases over time while the premiums remain the same.
Increasing Term
Death benefit increases over time while the premiums remain the same.
Renewable Term
The policy can be renewed at the end of the term without the need for a medical examination.
Convertible Term
The policy can be converted to a permanent life insurance policy without the need for a medical examination.

Permanent Life Insurance

Permanent life insurance provides coverage for the policyholder’s entire life, not just a specific period of time. The policyholder pays a premium, which is invested by the insurer. The policyholder may be able to access the investment portion of the policy through loans or withdrawals. If the policyholder dies, the death benefit is paid to the beneficiary.

There are several types of permanent life insurance:

Type of Permanent Life Insurance
Description
Whole Life Insurance
Guaranteed death benefit and cash value. Premiums remain the same for the entire life of the policy.
Universal Life Insurance
Flexible death benefit and premiums. The policyholder can adjust the death benefit and premiums over time.
Variable Life Insurance
Death benefit and cash value fluctuate based on the performance of the investments chosen by the policyholder.
Variable Universal Life Insurance
Combines the flexibility of universal life insurance with the investment options of variable life insurance.

FAQ About Life Insurance

What is the difference between term life insurance and permanent life insurance?

Term life insurance provides coverage for a specific period of time, while permanent life insurance provides coverage for the policyholder’s entire life. Term life insurance is generally less expensive than permanent life insurance.

How much life insurance do I need?

The amount of life insurance you need depends on several factors, including your income, debts, and the needs of your dependents. A general rule of thumb is to have coverage equal to 10-12 times your annual income.

How do I choose a beneficiary for my life insurance policy?

You can choose anyone to be the beneficiary of your life insurance policy, as long as you have an insurable interest in them. Common choices include spouses, children, and other family members. It’s important to review your beneficiary designation regularly to ensure it reflects your current wishes.

Can I change my life insurance policy?

Yes, you can change your life insurance policy. With term life insurance, you may be able to convert your policy to a permanent policy without the need for a medical examination. With permanent life insurance, you may be able to adjust the death benefit and premiums over time.

Do I need a medical examination to get life insurance?

It depends on the type of policy you choose and the insurer’s underwriting guidelines. With term life insurance, a medical examination may be required for policies with large death benefits or for older applicants. With permanent life insurance, a medical examination is often required regardless of the death benefit.

Conclusion

Life insurance is an important part of financial planning. It provides financial protection for those who depend on your income in the event of your death. There are many types of life insurance to choose from, each with its own advantages and disadvantages. By understanding your options and your needs, you can choose the right life insurance policy for you and your family.