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Life Insurance Basics You Should Know (2022 Edition)

 


What is life insurance?

A life insurance policy is a contract between you and an insurance company. In exchange for regular payments, called premiums, the insurer pays out money after you die. This payment goes to the people you choose as beneficiaries — usually children, a spouse, or other family members. It can be an important safety net if anyone depends on you financially. Beneficiaries can use the money to repay debts, replace your income, or provide funds for future expenses like college tuition.

What are the different types of life insurance?

There are two main types of life insurance: term and permanent. Within these two categories, there are various types of policies. Understanding which one is right for you can help you build a robust life insurance plan.

Term life insurance

Term life insurance works by covering you for a limited period of time, such as 10 or 20 years. You can choose a term length that matches your needs, and if you die within the term, your beneficiaries receive the payout. When your term life insurance expires, you can buy a new policy or reassess your options. Ideally, by the time the term ends, you no longer need life insurance: Your house will be paid down, your kids will be grown and you’ll have some money in the bank. Term life policies are often the cheapest type of coverage. In some cases, you can buy online life insurance without completing a medical exam. Term coverage doesn’t build cash value. In general, term life is sufficient for most families.

Types of term life insurance

  • Term life.
  • Annual renewable term life.
  • Instant term life.
  • Permanent life insurance

Permanent life insurance costs more than term life but offers additional features like a cash-value account, which grows over time. In most cases, you can borrow against the value of this account while you’re still alive. Whole life insurance is the best-known type of permanent life. Other types include universal life, variable, and variable universal. Permanent coverage can provide money for your heirs regardless of when you die. This type of insurance can also be useful if you want to spend your retirement savings but still leave money for final expenses, such as funeral costs.

Types of permanent life insurance

  • Whole life.
  • Universal life.
  • Indexed universal life.
  • Variable universal life.

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