An introduction to the life insurance basics you need to get started.
You’re reading Policygenius’ 4-part guide to shopping for life insurance.
Click here for Chapter 1: Understanding Life Insurance
Click here for Chapter 2: How Much Does Life Insurance Cost?
Click here for Chapter 3: How Do I Choose a Life Insurance Policy?
Click here for Chapter 4: Applying For Life Insurance
Life insurance provides a tax-free lump sum of money to your loved ones in the event of your death, allowing them to continue toward their financial goals. It’s a value asset that gives you peace of mind that they’ll be taken care of even when you aren’t around.
The number one question shoppers have about life insurance is “What kind do I buy?” For most people, that question comes down to two options: term life insurance and whole life insurance.
|What is it?||"Pure" Life Insurance||Life Insurance Plus Savings|
|Price||Around $20 -$30||Around 8-12x term life|
|Fine Print||Very Little||Quite a lot|
|Best Fit For||Protecting families and investments||Complex financial plans|
Often referred to as “pure” life insurance. It’s the type of policy most people think about when they imagine how life insurance works. You pay a premium in exchange for the promise that your life insurer will pay out a pre-set death benefit (also known as your coverage) to your survivors (or beneficiaries).
But term life insurance only lasts for a set period of time – the term. Once it’s up – ideally, when you no longer need the financial protection – the policy expires and you stop paying for it.
A type of permanent life insurance that lasts your entire life, as long as you continue paying premiums. Whole life insurance pays out a death benefit to beneficiaries, but it also has a forced-savings component called the cash value that can grow over time.
Whole life insurance is sometimes useful as part of a highly customized personal finance or estate planning strategy. However, it’s often prohibitively expensive. A whole life policy can cost 6 to 10 times more than a comparable term policy.
Most people will want their policy to last until they pay off their mortgage, but for others it could be something different, like your children graduating college.
Most term life insurance companies provide terms in five-year increments — i.e., 10-year term, 15-year term, and so on, up to 30 years. Your financial obligation probably doesn’t fit exactly into a standard term length, so your best bet is to round up. If your mortgage lasts for another 22 years, for example, pick a 25-year term.
If your financial obligation ends before your term life insurance expires, you can cancel your policy — no need to pay for extra years of coverage you don’t need.
What happens if you buy a policy with a term that’s too short? You have two options: Let the policy expire and leave yourself open to a coverage gap, or you try to purchase another life insurance policy. With the latter, you’re basically forcing Future You to buy another policy in twenty years at much higher rates, so it’s important to carefully consider the term while shopping.
Life insurance language seems to have come from another planet. Who can understand it? Well, this non-Martian life insurance top terms should help.
Death benefit — The amount of cash paid out to your beneficiaries when you die.
Premium — The amount you pay monthly or annually to keep your policy in effect.
Term — The period your life insurance policy lasts. Permanent life insurance doesn’t have a term and lasts your whole life.
Beneficiary — The person or persons, or some entity like a business, charity, or trust, that receives the death benefit after you die.
Policy — The document that you receive from your life insurance company explaining the details of your coverage.
Coverage — The amount of the death benefit that gets paid out.
Learning the basics of life insurance is the first step to understanding what you need and how to get it. Once you have this foundation in place, the rest of the process becomes much easier.
About the author
Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness. Colin has a degree in English from the University of North Carolina at Chapel Hill.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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