LIFE INSURANCE
Life Insurance
Life insurance is a contract between a life insurance company and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to one or more named beneficiaries when the insured person dies in exchange for premiums paid by the policyholder during their lifetime.
KEY TAKEAWAYS
- Life insurance is a legally binding contract that pays a death benefit to the policy owner when the insured person dies.
- For a life insurance policy to remain in force, the policyholder must pay a single premium upfront or pay regular premiums over time.
- When the insured person dies, the policy’s named beneficiaries will receive the policy’s face value, or death benefit.
- Term life insurance policies expire after a certain number of years. Permanent life insurance policies remain active until the insured dies, stops paying premiums, or surrenders the policy.
- A life insurance policy is only as good as the financial strength of the life insurance company that issues it. State guaranty funds may pay claims if the issuer can’t.
Types of Life Insurance
Term life insurance
Term life insurance is designed to last a certain number of years, then end. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. The best term life insurance policies balance affordability with long-term financial strength.1
- Decreasing term life insurance is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate.
- Convertible term life insurance allows policyholders to convert a term policy to permanent insurance.
- Renewable term life insurance provides a quote for the year the policy is purchased. Premiums increase annually and are usually the least expensive term insurance in the beginning.
Permanent Life Insurance
Permanent life insurance stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy.
- Whole life insurance is a type of permanent life insurance. It accumulates a cash value in order to last the lifetime of the insured person. Cash-value life insurance also allows the policyholder to use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums.
- Universal life (UL) insurance is a type of permanent life insurance with a cash value component that earns interest.