Who is life insurance for?
Life insurance is an important purchase for anyone who:
• Has someone depending on their income
• Has someone depending on them to provide services
• Will have someone depend on their income or services in the future
Someone who provides for a family needs life insurance. If they pass away and their income disappears, without life insurance, their loved ones could struggle to pay the bills. But someone who provides services needs to be covered as well. A stay-at-home parent provides valuable services, which someone might need to be paid to do upon their death.
Even individuals who do not currently have people depending on them should consider whether they will need coverage in the future. It is easier and cheaper to buy coverage when young and healthy. Those who wait until they have dependents and need coverage may develop health issues in the interim that make coverage harder or more expensive to get.
Here are the key components of a life insurance policy.
Premiums: This is the amount a policyholder pays for coverage. It could be paid monthly or annually.
Death benefit: This is the amount paid to beneficiaries upon a policyholder's death.
Cash value portion: When policyholders purchase whole life insurance, part of the premiums are deposited into a separate account and are invested. The policy accrues a cash value, which policyholders can cash in or borrow against.
What are the different types of life insurance?
These are the most common types of life insurance:
Term life insurance: A policy is in effect for a set number of years, such as 10, 20, or 30 years. Premiums are affordable, and the death benefit is paid only if the policyholder dies during the coverage term. There's no investment component or cash value.
Whole life insurance: A policy is in effect indefinitely while premiums are paid, and a death benefit is always paid. The costs are higher than for term life insurance but the policy accrues a cash value due to the savings portion of the policy. Policyholders are paid a fixed rate of return. They can borrow against the value of the policy or cash it out.
Universal life insurance: This is a type of whole life insurance that offers more flexibility than whole life policies. It also accrues a cash value. Policyholders can adjust the amount of their death benefit. While there is a minimum guaranteed rate of return, the exact return on investment (ROI) is not guaranteed and depends on market conditions.
Variable life insurance: This is another type of whole life insurance. The policy remains in effect indefinitely, and a death benefit is always paid. The cash value, however, is variable and no rate of return is guaranteed.
Guaranteed issue: Some insurers offer life insurance policies with a low amount of death benefits that anyone can qualify for without a medical exam and regardless of health status. These policies are also called "final expense insurance" because they can be used to cover funeral expenses.
What is term life insurance?
Term life insurance is a type of life insurance coverage that insures the policyholder's life. The policyholder chooses a death benefit, such as $250,000 or $1 million. The policyholder also chooses beneficiaries. Those are the people who receive the death benefit.
Term life insurance provides coverage only for a specific period. This is the key difference between term vs. whole life insurance, which is another kind of life insurance.
A term life policy might be in effect for 15 years, 20 years, 30 years, or some other designated time period. If the policyholder dies during the term, the death benefit is paid. If they don't, then it isn't. Policyholders need to understand this key discrepancy between term vs. whole life insurance, as whole life insurance remains in effect indefinitely.
What is whole life insurance?
Whole life insurance is another type of life insurance coverage. It's also sometimes called permanent insurance. Consumers need to know the difference between term vs. permanent life insurance to decide which is right for them.
One key difference between term vs. whole life insurance is the time the policy is in effect. Whole life insurance doesn't have a set coverage term. As long as the policyholder keeps the policy active, it remains in effect. Someone could pass away five years or 50 years after buying whole life insurance, and the death benefit would still pay out.
The other key difference between term life vs. whole life is that whole life policies are much more expensive. Insurers set premiums higher than what it would cost just to cover the policyholder based on their risk level, especially during the early days of the policy. The extra money is invested by the insurer. As a result, whole life policies acquire a cash value. When deciding between term vs. whole life insurance, policyholders should think about whether they want to invest in life insurance.
Term life vs. whole life: cost comparison
Whole-life policies are much more expensive than term-life policies. In fact, rates for whole-life policies are typically between five and 15 times more expensive than term-life policies. This is one of the biggest differences between term vs. whole life insurance.
Term life policies are cheaper because:
They aren't in effect for as long
There's no guaranteed payout of the death benefit
There's no investment component
The policies don't acquire a cash value
Whole life policies cost more because some of the premiums are invested. And the insurer must pay out the death benefit regardless of how old the policyholder is when they pass, as long as the insurance is still in effect.
