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Life Insurance 101
Life insurance is an essential part of any financial strategy. It provides peace of mind by helping protect the security of the most important people in your life. It can replace income for dependents, create inheritances, provide charitable contributions, and much more.
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Actions Protect your family with life insurance. Get an instant quote.
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Actions Introduction to Life Insurance
How does life insurance work? Here’s how you can use it to help reach your financial goals.
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Actions What is life insurance?
It’s a way to leave money to the people you care about most to cover anything — replacing income, funeral costs, help with mortgage payments, educational expenses and more.
How does life insurance work?
You make regular payments and the life insurer pays a benefit to your beneficiaries after you die. Depending on your policy, life insurance can also provide living benefits.
How can you use life insurance?
It does more than protect your loved ones. It can help you pay less in taxes, get money if you get sick, act as a source of supplemental retirement income1, or even help protect a small business.
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In addition to generally providing a generally federal income tax-free benefit, it can help your retirement strategy by creating a potentially tax-free source of supplemental retirement income to help manage taxes.
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There are two main types of life insurance: term life insurance, which provides coverage for a set length of time, and permanent life insurance, which may cover you for the rest of your life. Within both of these main types of insurance there are different types of policies. Term life insurance is like leasing a car. You choose how long the term is (typically 10, 15, 20, or 30 years) and you make equal payments for that length of time. After that premiums typically increase annually. Permanent life insurance is more like buying a car. It potentially covers you for the rest of your life and may build value over time. Which is right for you depends on several factors, including what you want the insurance to cover, what amount of coverage you need, how long you’ll need the coverage for and what your budget is.
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One main way insurance companies calculate the cost of life insurance is by estimating “mortality” — the rate at which people die. There’s a mortality pattern based on age and health factors that those calculations are based on; the process of predicting it is called underwriting.
Generally, the younger and healthier you are, the less the cost or “premium” of your life insurance policy, so purchasing it while younger, instead of putting the purchase off could save you money. The possibility of getting a disease later on could increase the amount you have to pay for life insurance, even more — or even make you uninsurable — later in life.
Several other factors are taken into consideration when underwriting life insurance. For example, things like tobacco use, health conditions, driving violations, risky behaviors or activities and potentially dangerous jobs, might increase your cost.
Some life insurance policies have non-flexible premiums that are a specific amount, paid at a specific frequency, like monthly or annually. If paid annually it will typically be less. Other life insurance policies have flexible premiums; these are paid in varying amounts at different times. That means that you can change the amount of premium you pay (within limits) and when you pay. The policy will stay in force as long as its value is enough to pay its costs and expenses.
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What are your goals?
Do you want to build cash value? Help your family cover final expenses? How will the policy fit into your overall financial goals?
What type of policy do you need?
Should you get permanent life insurance or term life insurance, and what are the differences between the two?
How long do you want coverage?
If you want it for your entire life, a permanent policy might be best. If you need it for only 10, 15, 20 or 30 years, term may be a better choice.
How much coverage do you need?
You don’t want to be over-insured, or maybe worse, underinsured. This life needs estimator can help you determine the amount.
What’s your budget?
Knowing what you can afford will help you find the right policy at the right price. And deciding to pay your premium monthly, quarterly, biannually, or annually will help you manage your costs.
What drives the cost of life insurance?
There’s a lot that determines what you’ll pay. This article will tell you everything that’s involved.
Who are your beneficiaries?
In other words, who will receive the funds from your policy when you die? You can leave the entire amount to a single individual, divide it among relatives, or leave it to friends, charitable organizations, or your estate.
How can life insurance help you while living?
Some policies have “living benefits” that you can access while you are alive. Learn more about living benefits.
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Actions What life insurance terminology do I need to know?
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Actions Types of Life Insurance and Why They Matter to You
Finding a policy that’s right for your needs and goals is easier when you know the types of policies available and what they are designed to do.
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Understanding the types of life insurance
There are several common types of life insurance policies available.
Types of term insurance
Term life insurance lasts for a certain number of years. It’s usually best when you know the end date of the need or obligation you’re covering.
Types of permanent insurance
Permanent life insurance can cover you for up to your lifetime, and some policies can offer advantages while you're alive.
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Actions Footnote
- 1 You can access your cash value through loans and withdrawals. In general, loans are charged interest; they are usually not taxable. If a policy lapses or is surrendered, the loan becomes immediately taxable to the extent of gain in your policy. Withdrawals are taxable only when you take more money out of the policy than you’ve paid in premiums. If your policy becomes a Modified Endowment Contract (MEC), different, less advantageous tax provisions apply. Loans and withdrawals may reduce or eliminate the death benefit payable to your beneficiaries.
Please remember quotes are based on the information you provided. Underwriting of your medical history and other factors may be required to determine whether you are eligible for coverage and, if so, what premiums would apply. This review may result in a higher premium than initially quoted. Please note that all guarantees are based upon the claims-paying ability of the issuer. Our policies contain exclusions, limitations, reductions in benefits and terms for keeping them in force.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. If you would like information about your particular investment needs, please contact a financial professional.
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