What Is Life Insurance?

Life insurance is a financial product that pays a sum of money to a named beneficiary at the death of an insured individual. Insurance policies called “permanent” or “cash value” insurance develop cash values that have the potential to grow tax deferred, providing policy owners with a benefit they can use during their lifetime. Insurance proceeds are generally paid free from income taxes and they are not subject to probate. Thus, life insurance proceeds pass quickly and directly to the beneficiary.

Whole Life:

Individual whole life insurance, often called permanent or traditional insurance, is intended to provide lifelong protection. As long as the owner of the policy continues to pay the premiums, the insuring company will pay the death benefit. These policies are designed and priced for an individual to keep over a long period of time. The premiums are set according to the insured’s age at the time of purchase, and they generally remain level for the life of the policy.

A major advantage of whole life policies is that they do not need to be renewed. In addition, part of the premiums paid into the policy go into cash value growth, while other parts of the premium help pay insurance costs and other expenses such as underwriting costs, administrative expenses and commissions.

Term Life:

Term insurance pays a death benefit to survivors if the policyholder dies while the contract is in force. Term policies offer only death benefit coverage with no cash value component. Coverage is for a contracted period of time (or term), and is usually contracted for a specified number of years, or to a specific age of the insured.

Universal Life:

Universal life is a form of cash value insurance that allows the buyer to vary premium payments, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. Fixed premium payments are not required. Owners of universal life products can reduce or increase the death benefit in these policies and have the flexibility to decide the size and frequency of payments, as long as the total amount of premiums paid over a period of time is enough to keep the policy in force. As policyholders get older, the minimum premium payment may increase.

Since cash values have the potential to grow in a universal life policy, cash accumulates tax deferred, providing a valuable benefit. Cash values earn both a guaranteed interest rate plus the potential for additional interest, reflecting the company’s investment earnings. Guarantees are based upon the claims paying ability of the insurer.