Life Insurance 101

What is life insurance?

Life insurance can be summarized into two words: income replacement.

In the unfortunate event that you pass away, a life insurance policy would provide financial stability to your loved ones. If you die before you are able to create a large enough savings account or investment account to leave to your loved ones, they could be subject to financial hardship (mortgage and loan payments, health insurance premiums, living expenses, etc.) in your absence. However, a life insurance policy would pay out a lump sum of money to your loved ones and elminate their financial hardship.

You, as the policyholder, would make payments (also called premiums) to a life insurance company, either on a monthly, semi-annually, or annual basis. In the event that you die during your coverage period, the life insurance company promises to pay out benefits to a person or group of people that you specified in your life insurance policy.

With life insurance, you can be sure that your loved ones will be financially supported and can continue to live the lifestyle that they enjoyed when you were taking care of them.  Life insurance provides the peace of mind of knowing that your family will continue to be financially sound and stable in your absence.

What is the difference between Term and Permanent Life Insurance?

Term life insurance:

• One of the most affordable options for life insurance
• The policy pays out a benefit to your specified party if you were to die within a specified period of time (Term)
• Term refers to the set time period that you will be covered under the policy
• Term also refers to the period of time in which you will pay premiums
• Terms can last anywhere from 10, 20, or even 30 years
• At the end of a term, coverage can continue if a policyholder continues to pay premiums, but usually at a much higher cost
• Has no intrinsic cash value (if term ends before death, no benefits may be paid out)
• Policy can only pay out if the policyholder is in good standing (has paid all premium payments that are due)
• There are various types of term life insurance (guaranteed level, return of premium, annually renewable, etc.)

Permanent life insurance:

• Is usually more expensive than term life insurance
• Permanent life insurance policies cover the policyholder for life until he or she dies
• Benefits are usually paid out to specified parties regardless of when or how the policyholder’s death occurred
• Has intrinsic cash value. A policyholder can build long term savings through a permanent life insurance policy
• Part of your premium payment for a permanent life insurance policy goes toward a cash value which accrue interests and grows
• Term life insurance policies can usually be converted into permanent life insurance plans
• Usually preferred when managing your estate or when you are too old for term life insurance
• As with term life insurance, the policy can only pay out if the policyholder is in good standing (has paid all premium payments that are due)
• There are various types of permanent life insurance (whole life, universal life, and survivorship/second-to-die)

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