Life Insurance 101

Step 1: Life Insurance Basics

A life insurance policy can give you peace of mind. There is such a weight off your shoulders when you know that the financial future of your family or business is protected.

Life insurance provides your family a tax free benefit when you pass away. There are other benefits of life insurance depending on the type of policy.

The two main types of life insurance are Term Life and Permanent Life insurance. You’ll need to know how the two main types of life insurance policies work and how they differ.

Step 2: Next we’ll break down how these 2 types of life insurance work.

Step 2: Term or Permanent Coverage?

Term Life Insurance

How Term Works

• Term life insurance provides coverage for a specific time period. Term policies typically last anywhere from 1 – 30 years.
• When your term policy is ending, you may renew it or let it end.
• Sometimes you can convert your term policy to a permanent life insurance policy.

Term Life Benefits

• Term life insurance is typically the least expensive type of policy.
• A term life policy will provide your loved ones a tax free benefit when you pass away.
• The death benefit can be used to pay for your funeral, replace your income, pay for your children’s education, pay off your mortgage or any other financial situations.

Permanent Life Insurance

How Permanent Life Works

• Permanent life insurance provides you lifetime coverage if you pay your premiums.
• Permanent life insurance is a category of policy types. You can choose from a number of permanent policies based on your specific needs and goals. Here are the main types of permanent policies:
  • Whole Life: With whole life insurance, you’ll have a fixed death benefit to go along with a fixed premium. Whole life grows cash value that can be withdrawn as policy loans. Whole life is often the most expensive permanent policy.
  • Universal Life: Universal Life Insurance (UL) can provide shoppers flexibility. Your premiums and death benefit are flexible by having the ability to alter your premium payment amounts as well as the death benefit amount. 
  • Indexed Universal Life: Index Universal Life (IUL) is a type of UL policy. It’s very similar to a UL, with one exception. An IUL’s interest is based on the indexes of the stock market vs a fixed rate of a UL policy. This means an IUL can grow more cash value compared to a UL (potentially) depending on the market.
  • Guaranteed Universal Life: Guaranteed Universal Life (GUL) is often the most affordable permanent policy type. It is often called “Lifetime Term” because it provides coverage for your entire life, but is affordable like term.

Permanent Life Benefits

• The majority of permanent life insurance policies are structured to build cash value. A part of your life insurance premiums will pay for your policy’s coverage. Any additional premium amount will grow cash value. Over time, your policy may have enough cash value growth for you to borrow from. You can access this cash with policy loans or straight withdrawals. You also can reduce your premium payments in the future with your cash value.
• You get tax advantages with permanent life insurance policies. First, you get a tax free death benefit. Second, you can grow your cash value in a tax deferred account. If this is setup properly, your cash loans or withdrawals from your life insurance policy are typically not taxed.
• You may use the cash value growth while you are still alive and still have a death benefit when you die. The cash value can be used as supplemental income, help pay for emergencies or any other needs.

Step 3: Selecting Coverage

Here are the three main issues that you need to think about when buying your life insurance policy:

• Duration- Do you need coverage for your entire life or a shorter timeframe? Term is great for coverage lengths from 1 to 30 years. Permanent life insurance is optimal for those looking to have protection for their entire life.
• Price- Term life insurance policies are usually a lower priced policy compared to permanent life. Just know that your final price for your coverage will be based on a variety of underwriting factors such as:
  • Gender—Males typically receive higher rates because of shorter life expectancy
  • Your past health records
  • Results from the paramedical exam and lab work
  • Your family medical history
  • Lifestyle— Are you a tobacco user, drink alcohol, and participate in risky hobbies like SCUBA diving?
• Risk- There are risks with term and permanent policies. With term, you’re risking paying for a policy that you may outlive. With permanent policies, there are a few options with how the cash value in your policy can grow. For example, you can get a policy that earns interest based on a fixed interest rate or a policy that grows from investment decisions you make in separate accounts.

Want to find out how much life insurance you may need? Check out our life insurance needs calculator.

What if I have a policy through work?

Think of your group policy through your employer as a bonus benefit that your job provides you.  Your employer’s life insurance policy is not really designed to meet all of your future needs.

Buying your own individual policy provides you the ultimate protection. What happens if you change employers? You can lose your group coverage and the benefits that have been accumulated. 

Step 4: When do I buy a life insurance policy?

The best time to buy a life insurance policy is now. Why? The simple answer is that life insurance always gets more expensive the older you get. Another reason to get it earlier than later- you’re usually healthier when you’re younger. 

How do I buy a life insurance policy?

Start by contacting an independent life insurance broker like Life Insurance Blog. They can assist you by answering all of your questions, shop your case to dozens of the best carriers and provide you a variety of policy types to choose from.