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What is life insurance? Most know it’s a wise decision, but being able to answer that question is an important part of making the best choice. There are many different types of life insurance that cover everything from accidental death to funeral expenses. Use Benzinga’s informative life insurance guide to learn the ins and outs of life insurance.
What is Life Insurance?: Life Insurance Definition
Life insurance is a contract between a policyholder and an insurance company. The contract states simply that the policyholder, the insured, will make monthly payments to the insurance company, the insurer, known as premiums. In return, the insurer will make a one-time financial payout to a beneficiary upon the insured’s death. The amount of the payout and the beneficiary of that sum gets determined at the onset of the contract.
How Does Life Insurance Work?
Life insurance is a safeguard against the unexpected. If anything should happen to you, then the beneficiary, usually one or more of your family members, will get taken care of financially. But insurance isn’t free; it’s an investment.
How Much Coverage Do You Need?
The first step in choosing the right type of life insurance for you is determining just how much you believe you need. Of course, you can’t put a price on human life, but if you were to die tomorrow, how much loss do you believe your family would suffer financially?
Once you’ve determined the amount you believe your family would require to go on living life without you, you need to find out if you can afford it. The investment you put into or payments you make toward your policy are called premiums.
Essentially, the higher the premiums (the more money you invest), the higher the payout, or the death benefit. There are other mitigating factors such as age, health and occupation, but essentially, the more you invest, the more gets paid out.
Once you’ve determined how much coverage you’ll need, balanced with the price of premiums you can afford, then you can make a contract with an insurance company. This contract states simply the amount you will pay in (your premiums), the amount that gets paid out (the death benefit), and who is the beneficiary.
Important Life Insurance Terms and Definitions
What exactly are the different types of life insurance policies, their terms and definitions? It’s not as complicated as you may think.
What is a life insurance premium?
A premium is the amount, or rate, at which you pay to keep your policy active in return for coverage. In essence, the more you pay in, the more you get out. The amount of the premiums gets determined by:
- Amount of death benefit
- Family history
Other factors come into play, such as your occupation, your weight, and if you smoke. Term length of the policy is also a factor when determining premiums. Premiums typically remain constant throughout the life of the policy.
Premiums are paid monthly, quarterly, semi-annually or annually. You can even pay them in one lump sum. Life insurance premiums are not tax-deductible, although the death benefit is tax free. With some policies, like whole and universal life, premiums paid toward the cash value of the policy are tax-deferred.
Permanent policies, like whole life, also allow you to take loans against the cash value of the policy. The amount of premiums you pay determines the cash value.
What is a death benefit in life insurance?
The death benefit is the amount that gets paid out to the beneficiary upon the death of the policyholder. The policyholder determines the amount of the death benefit while premiums are set by the insurance company.
The death benefit is the amount that the policyholder has determined their family will need in the event of their death. This is determined by:
- How much the insured believes they will earn in their lifetime
- How much the insured believes their family will need to live without them
- How much in premiums the policyholder can afford
Most insurance agents recommend purchasing an insurance policy with the death benefit set at 7 to 10 times what you earn annually. The policyholder can adjust the amount higher or lower depending on how much money they believe their family needs. These are all dependent of course on how much in premiums the policyholder can afford in the first place.
What is a life insurance beneficiary?
Every life insurance policy has the insured (the policyholder), the insurer (the insurance company), and then there’s the beneficiary. The beneficiary is the person/s who will benefit financially from the completion of the policy. In short, the beneficiary is the person who gets paid when the policyholder dies.
Who can be the beneficiary of a payout? Typically, it’s a family member, a spouse or children or grandchildren of the insured. It doesn’t have to be, though. A life insurance beneficiary can be a charity or a trust. It can be the policyholder’s own estate.
Just in case something happens to the primary beneficiary of the policy after the policyholder dies, like the beneficiary has passed away as well, the policyholder can name a secondary beneficiary. The policyholder can name multiple beneficiaries. Beneficiaries can be business partners or even a friend, and you can even split the death benefit between multiple parties as spelled out by the policy. Payouts are tax free.
What is accumulated cash value in life insurance?
Accumulated cash value in a life insurance policy is any type of policy that not only consists of a death benefit, but a separate cash investment account as well. Accumulated cash value is available to permanent life policyholders. This can include:
- Whole life
- Universal life
- Variable life
Term life policies do not carry a cash value component.
With a cash value insurance policy, each time you pay your premium, the money gets split among 3 separate categories:
- Cost of insurance
- Cash value
Cash value is separate from the death benefit. The beneficiary of the policy does not receive proceeds from this account when the policyholder dies. Any cash value remaining in the policy becomes part of the policyholder’s estate and therefore taxable.
The 2 Main Types of Life Insurance
There are all kinds of life insurance policies, but 2 main types define the space: term and whole life.
What is term life insurance?
A term life policy lasts for a predetermined period of time. The term of the policy can last 10 years, 20 years, or even 30 years. Because term life policies have a limited scope and don’t last for the lifetime of the policyholder, they are more affordable than permanent policies. They also don’t carry a cash value.
There are 2 basic types of term life policies. The increasing premium term renews annually at higher rates while the level premium term contains a fixed rate for a predetermined number of years. After the term ends, the policy is renewable at a higher rate.
Term life policies are more popular with people who need coverage for a specific time period. Term life policies are not utilizable as investment vehicles.
What is whole life insurance?
Whole life is a permanent policy and carries with it a cash value as well as a death benefit. The policy is in force for the whole lifetime of the policyholder and is more expensive than term life. Whole life policies are most often utilized not just as protection against the unexpected, but as an investment vehicle as well.
Whole life premiums are consistent throughout the lifetime of the policy. The lion’s share of premiums go toward the death benefit with a smaller portion dedicated to the cash value of the policy. You can borrow money against a whole life policy and when you die the benefits are tax free. Any loans taken against the value of the policy get deducted from the death benefit upon termination of the policy.
Whole life policies are usually seen not just as financial protection but as an investment as well. If the policyholder should outlive the policy, all premiums get returned with interest.
Other Types of Policies
While term and whole life are the 2 main types of insurance policies, there are other kinds, covering everything from accidental death to dismemberment.
What is universal life insurance?
Also known as cash value insurance, universal life is permanent life insurance that lasts your whole life. Unlike standard whole life, however, premiums get split into 2 different accounts: one for life insurance and one for investments or savings.
Types of universal life insurance are:
Most people who buy a universal life insurance policy are doing it for investment purposes, a way to grow their money while at the same time receiving tax benefits. A universal life policy is much like a savings account with the added bonus of a death benefit.
Most universal life policies offer a guaranteed rate of interest. Universal life policies offer fixed-rate plans as well as variable ones, both remaining tax-deferred until the time of withdrawal. You can adjust the rate you pay your premiums to suit your budget, and even take out loans against the cash value. Interest payments on such loans go directly back into the policy’s cash value.
What is indexed universal life insurance?
Indexed universal life (IUL) is universal life with a stock market twist. While an IUL policy offers the same benefits as a standard universal life policy, it also allows the policyholder to invest in stock market index funds like the S&P 500 or the Nasdaq-100.
IUL policies are more volatile than fixed-rate universal life policies and are for the more savvy investor. They are, however, less risky than variable UL policies in that they get more broadly invested and are less likely to lose value so quickly.
IUL policies are also tax-deferred with cash value investments on top of a death benefit. IUL policies are permanent insurance that last your whole life and accumulate cash value. Companies often use IUL policies for:
- Business owners
- Financial planning
- Estate planning
What is supplemental life insurance?
Supplemental life insurance is coverage you can purchase from your workplace in addition to your group life policy. Unlike your group policy, which is often paid by your employer, supplemental life insurance comes out of your paycheck. Supplemental life is a form of term life insurance.
Supplemental life is an attractive addition to those employees who feel they need more coverage than their group life policy offers. As well, many supplemental plans cover things like:
- Burial costs
- Accidental death and dismemberment
- Coverage for family members
Supplemental life insurance is also a good idea if you think you might change jobs. Coverage is available through your employer or on your own.
What is variable life insurance?
Variable life insurance is a type of permanent insurance with a cash value. All variable life insurance policies consist of 3 main components:
- Death benefits
- Cash value
Like all life insurance policies, variable life comes with a death benefit, but that’s where variable life and a standard whole life policy part ways. In a variable life policy, a portion of your premiums goes towards the policy’s cash value. This cash account can be invested in numerous assets, including securities and bonds.
Variable life insurance allows the policyholder to invest the money as they see fit, while at the same still retaining the added security of a death benefit. It’s like the stock market and a life insurance policy all rolled up into one. Gains in the cash value account sometimes get used to pay down premiums. Variable life policies also offer a fixed-rate option.
What is variable universal life insurance?
Variable universal life offers the best of both worlds. Policies are a combination of both universal and variable life. This means your premiums are adjustable, and that the cash value section of the policy can even be used to pay premiums if its value covers the costs.
Variable universal life is a permanent policy that carries with it both a cash value and a death benefit. Because it is a variable policy, it allows you not only to have a cash account, but to invest it as you see fit, such as in stocks or bonds. Variable universal life policies are more risky than fixed-rate ones because the cash value rises and falls with the success or failure of its investments. They are typically reserved for the more savvy investor.
Added risk includes reduced cash value due to investment losses that could even cancel your death benefit. Profits from gains are tax-deferred and the death benefit is tax-free. Variable life insurance is a permanent policy, and therefore more expensive.
What is final expense life insurance?
Final expense insurance pays for end-of-life costs so the policyholder’s heirs won’t get saddled with costly funeral expenses or leftover medical bills. It’s a type of permanent insurance, but because coverage has such a limited scope, it’s not as expensive as a standard life insurance policy.
One big difference between final expense life insurance and other permanent life insurance policies is that it does not require a medical exam. Just a few questions and the policy is in force.
Benefits of final expense insurance are:
- Death benefit guaranteed
- Cash value tax-deferred
- Burial expenses optional (up to the beneficiary)
- Earns dividends
- Premiums remain payable beyond age 100
The term of the policy lasts until the death of the policyholder.
What is group life insurance?
Group life insurance is a policy that covers an entire group of people, usually a company where the employer pays the premiums. Group insurance is typically provided as part of an employee’s benefits package and is a term life policy.
The advantage to a group life policy is that not only is the employer paying the premiums, but because it is a group there is a sizable discount. Premiums per employee are much more affordable than if the employees were paying the policy individually.
A group policy is actually kept by the employer so that each employee does not get their own policy, but a certificate of insurance instead. Just like with standard term life insurance policies, the employee does get to choose the beneficiary.
Benefits to a group policy include:
- Employer paid
- Employee names beneficiary
- Discounted premiums
What is key person life insurance?
Key person insurance is a type of business insurance designed to protect companies if a key person dies suddenly and the business gets thrown into disarray. It works like life policies in that it offers financial protection to a business should a person who plays a heavy role in the financial success of a company passes away.
Key person policies are whole life coverage and thus more expensive than term life.
It’s the company that decides who is a key person. Typically, key persons include:
While the death benefit chiefly helps keep the company afloat while searching for a replacement, it also allows for other partners in the business to purchase the key person’s interest in the company.
One advantage to a key person policy is that the business can use the cash value of the policy to pay for business expenses.
In the case of a key person life policy, the company is both the policyholder and the beneficiary. Key person insurance is one of the best business insurance policies on the market today for companies.
What is no medical exam life insurance?
A no medical exam life insurance policy is coverage that doesn’t require an extensive medical exam, but can be purchased typically with answering just a few questions. No medical exam life insurance policies typically come with lower death benefits and are usually term life policies.
Four main types of life insurance that don’t require an exam are:
- Group life
- Guaranteed issue
- Simplified issue
Rates for no medical exam policies vary widely. While some settle for less benefits because they have health issues, others are young people who simply do not require a medical exam.
For example, a guaranteed life policy may only cover up to $25,000 in death benefits. Group policies, while carrying higher death benefits, require no exam but the risk gets diluted because of the sheer number of people insured.
What is accidental death and dismemberment life insurance?
Accidental death and dismemberment insurance (AD&D) is different from a standard life policy in that it only covers death in a limited fashion, if it is an accident. Because its scope is limited, it is more affordable than a base life policy, which covers death in any fashion.
AD&D policies are typically:
- Added as a rider
- Limited to type of death
- Limited in coverage
- Not covered for natural death
- Often serve as double indemnity (pay double)
AD&D policies also payout for dismemberment. This means loss of limb, partial or permanent paralysis, and loss of sight, hearing or speech. The terms of the payout depend on the individual policy. AD&D policies are typically utilized at hazardous workplaces where accidents are more likely to occur.
How to Choose the Right Policy
Choosing the right plan can be tricky. It’s important to make a list of the benefits you’re looking for combined with the rates you can afford. When choosing the type, whether it be term or permanent, exactly what you’re looking to get out of it is key.
Most people looking at an insurance policy as an investment prefer a permanent policy, while those looking for more affordable insurance for a specific period of time tend to gravitate towards term life.
When choosing the right type of insurance policy for you, consider:
- Cost of premiums
- Duration of policy
- Amount of death benefit
- Investment possibilities
- Tax benefits
Bestow offers 2 kinds of life insurance policies: 20-year level term policy or a 10-year level term policy.
Through its policies, you may qualify for up to $1 million in term life insurance. That may seem like a sizeable sum, but if you have a spouse and children, you have to consider the cost of things beyond your mortgage, such as daycare and eventually college, as well as the loss of wages over time.
Bestow uses its proprietary technology to underwrite your insurance policy, so the application process is much faster than with traditional life insurance companies. They’re also backed by Munich Re and North American Company for Life and Health Insurance, 2 A+ rated insurance companies.
- People who are looking for short-term life insurance
- Individuals who don’t want to go through the hassle of having a medical exam or blood work done to get coverage
- Plans start at just $8/month
- Decent coverage options if you need insurance quickly and without hassle
- Offers 2 types of plans; does not offer whole or universal life insurance policies
- The 10- and 20-year plans not available to users under 21 or older than 55
Northwestern Mutual offers a variety of life insurance policies that are suitable for a wide range of people. Policies are available in all 50 states, although some policies and riders may not be available in every state. The company has strong financial strength ratings and an above-average rating when it comes to consumer complaints.
To get a quote from Northwestern Mutual, you have to talk to one of its agents. However, you can browse information on its website and use the coverage calculator tool to estimate how much life insurance coverage is recommended for your family.
- Affordable term life insurance that can be converted to a permanent life insurance policy later
- Adding riders to a life insurance policy
- Strong financial strength ratings and a low number of consumer complaints
- Several types of life insurance policies available
- Offers other financial planning, insurance and investment products and services
- Lack of clarity about the product offerings on Northwestern Mutual’s website
- Can’t get a quote or apply directly for a policy online
Fabric offers term life insurance, free digital will creation and other tools to help you better your family’s financial life. They’re the one stop shop for young families looking for financial security.
Fabric offers 10, 15, 20, 25 and 30 year term options and coverage ranging from $100,000 to $5 million.
Fabric offers highly reviewed online customer service through its app and website and has the highest TrustPilot rating in its class.
- No exam required for most
- Those who want to avoid the hassle of insurance salesmen
- New or expecting parents looking for a broader suite of financial tools
- Affordable premiums
- Free digital will creation
- Free app with helpful tools for parents
- Apply and see your rate in less than 10 minutes
- No term life coverage in New York or Montana
- Can’t increase coverage after purchasing
With more than 12 million active customers, Transamerica Corp. is one of the biggest names in the life insurance industry. Transamerica offers a wide array of life insurance products — everything from term to a variety of permanent life insurance products, including whole, universal and variable life.
Transamerica life insurance policies are available to anyone ages 18 to 80, with coverage starting at just $25,000 and going as high as $10 million. In addition to term and permanent life insurance policies, Transamerica offers final expense insurance and any number of riders to help customers customize their policies.
- Coverage with chronic conditions
- High benefit policies
- Term life policy quotes and purchase available online
- Wide array of products
- Comprehensive online resources
- No medical exam required for many term policies
- Below-average scores from the National Association of Insurance Commissioners (NAIC) and J.D. Powers
- Policies purchased through agents only
- Disproportionate number of customer complaints
Ladder offers policies with no hidden fees, on-the-spot underwriting and a streamlined website. Coverage ranges from $100,000 to $8 million and you can adjust your coverage over time as needs change.
You can choose a 10, 15, 20, 25, or 30-year term. Ladder also offers up to $3 million in coverage without a medical exam — just answer a few health questions and complete the application to get an instant decision.
Ladder doesn’t impose policy, cancellation or processing fees and you can cancel at any time. Take three steps to get Ladder insurance:
- You can apply for life insurance coverage with Ladder right now via the online application.
- Find out whether you’re instantly approved.
- Accept your offer — including affordable prices and no hidden fees.
Its price lock guarantee ensures your premium won’t increase as your health changes and you age. Policies in New York are issued by Allianz Life Insurance Company of New York and in the other states and DC by Allianz Life Insurance Company of North America. You can receive a refund within the 1st 30 days if you’re unhappy with your coverage and you can cancel at any time.
- Term life insurance
- Online application
- Policyholders between 20 to 60 years of age
- Up to $8 million in coverage
- Price lock guarantee
- No policy fees
- 30-day money-back guarantee
- Adjustable coverage
- No policy riders
- Term life insurance only
Choosing the Right Policy
Now that you know what kind of life insurance policy you need, the question becomes where do you find it. Benzinga has all kinds of ways to help you find the best life insurance for you, from the top companies to the policies that fit you best. Let Benzinga put its years of experience to work for you.
Frequently Asked Questions
Is life insurance taxable?
Life insurance is a great investment in that the death benefit, whether the policy is term or permanent, is always tax free. Loans taken against the policy, or cash taken out, are tax-deferred but not tax-free.
How much life insurance do I need?
The amount of life insurance you need is dependent upon your individual circumstances. Generally speaking, the industry standard states you should have anywhere from 7 to 10 times your annual income.
Is life insurance worth it?
While some may argue that life insurance is not a good investment because of the low rate of return, it is a guarantee that if anything happens to you, your family will be taken care of. Life insurance is as close to a sure thing you’re ever going to get, financially speaking.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.