Life Insurance 101
Understand the basics of life insurance and how it can protect your family and build financial security.
Why Life Insurance Matters
Many financial experts consider life insurance to be a cornerstone of sound financial planning. It can play a critical role in several situations by providing income replacement, covering final expenses, creating an inheritance, paying estate taxes, supporting charitable goals and even serving as a forced savings vehicle.
Key Purposes
Replace Income: Provides funds to support dependents if the primary earner dies.
Cover Final Expenses: Pays funeral and burial costs, probate fees and medical bills not covered by health insurance.
Create an Inheritance: Allows you to leave a legacy for your heirs even if you do not have other assets.
Pay Estate Taxes: Provides liquidity to pay federal and state estate taxes so heirs do not need to sell other assets.
Charitable Giving: Names a charity as beneficiary to provide a larger donation than giving cash alone.
Forced Savings: Certain permanent policies build cash value that can be borrowed or withdrawn, functioning as a tax‑deferred savings plan.
Types of Life Insurance
Choosing the right policy depends on your needs and budget
Term Life
Term insurance is the simplest form of life insurance. It pays a death benefit only if death occurs during the specified term, usually 1 to 30 years. There are two basic varieties:
- Level term: Death benefit stays the same throughout the policy.
- Decreasing term: Death benefit declines annually over the term.
Whole Life (Permanent)
Permanent policies provide coverage for your entire life. In traditional whole life policies, both the death benefit and the premium remain level throughout the insured’s lifetime. Overpayments in the early years create a cash value that can be accessed if you surrender the policy.
- Guaranteed death benefit whenever you die
- Accumulates cash value accessible via loans or surrender
- Fixed premiums for life
Universal Life
Universal life (adjustable life) offers more flexibility. The policy’s cash value earns interest at money‑market rates and, once value has accumulated, you can adjust premium payments as long as there is enough value to cover costs.
- Flexible premiums and death benefits
- Cash value grows at a variable interest rate
Variable Life
Variable life combines life insurance with an investment component. Premiums are invested in stock, bond or money market portfolios; cash value and death benefits may grow more quickly but involve investment risk.
- Potential for higher returns
- Investment and market risk may reduce cash value and death benefit
- Requires monitoring and adjustment
Key Considerations
Make informed decisions about coverage amount, cost and beneficiaries
Assess Your Needs
Consider your family’s financial dependence on your income, outstanding debts, education costs and long‑term goals to determine the appropriate coverage amount.
Compare Premiums
Obtain quotes from multiple insurers. Term policies generally have lower initial premiums, while permanent policies offer lifelong coverage and cash value but cost more.
Review Beneficiaries
Keep beneficiary designations up‑to‑date to ensure proceeds go to the right people. Consider naming contingent beneficiaries and reviewing designations after major life events.
Get the Right Protection
Life insurance can be a vital part of your financial plan. By understanding why you need coverage and the different policy types, you can protect your loved ones and build financial flexibility.