Life Insurance Basics

What are common life insurance terms to know?

• Premium: The regular payment required to keep a life insurance policy active, usually paid monthly or annually.
• Beneficiary: The person designated to receive the payout from the policy upon the death of the insured or a qualifying event, such as a terminal illness.
• Policyholder: The person who owns the life insurance policy and is responsible for paying the premiums.
• Policy loan: A loan against a policy’s cash value.
• Cash value: The equity that builds over time when a portion of the premiums is invested.
• Accelerated death benefit: A benefit paid before the policyholder’s death to cover costs associated with a catastrophic illness.

What are the different types of life insurance?

Term life insurance

Term life insurance provides coverage for a specific period of time and pays a death benefit to your beneficiary if you die while the policy is in effect. Its relatively low cost may allow you to purchase more coverage for less money.

There are two main types of term life insurance policies:

• Level term policy: The death benefit remains the same throughout the entire length of the policy.
• Decreasing term policy: The death benefit declines over the course of the policy term, typically annually.

Permanent life insurance

Permanent life insurance provides lifelong coverage and includes an investment component. These policies generally pay dividends and build cash value that is tax favored. Premiums are typically higher than those for term life insurance.

Common types of permanent life insurance:

• Whole life: Premiums remain the same for as long as you hold the policy.
• Universal life: Flexible premiums and adjustable death benefit options.
• Indexed universal life: Flexible premiums and adjustable death benefit options with an investment or savings component that may be exposed to market returns.
• Variable life: Offers a selection of investment funds. Cash value and death benefit are based on investment performance.
• Variable universal life: Flexible premiums and adjustable death benefit options with an investment component that may be exposed to market returns through mutual funds.

Once you have built a solid foundation in life insurance basics, you can begin choosing the life insurance plan that best fits your and your family’s needs. As a key part of your overall financial planning, it is important to review your coverage as your life changes, such as getting married, having children or getting divorced.