Life Insurance Basics

Thinking about purchasing a life insurance policy? With so many choices on the market, it can be challenging to determine which route is right for you. Below are some core points about life insurance that might help you start exploring your options.

Quick Comparison: Types of Life Insurance

Type	Premiums	Coverage Duration	Cash Value	Flexibility	Investment Feature
Term Life	Level or increasing	10, 20, 30 years (or custom)	No	Low	No
Whole Life	Level	Lifetime	Yes	Low	No
Universal Life	Flexible	Lifetime (if funded)	Yes	High	No
Indexed UL	Flexible	Lifetime (if funded)	Yes	High	Index-linked
Variable Life	Level	Lifetime (if funded)	Yes	Medium	Market-based

What is Life Insurance?

Simply put, life insurance is a contract between a policyholder and an insurance provider. It generally has four primary components:

Premium payments: The money the policyholder pays the insurer.
Death benefit: The amount paid out to beneficiaries when the insured person passes away.
Cash value: A savings or investment component included in permanent policies.
Term period: The length of time during which coverage applies (for term policies).

In most situations, insurers require medical underwriting; some may also need financial underwriting. This typically involves a health exam and a review of your medical history.

What Kinds of Life Insurance Are Available?

Many forms of life insurance exist, including whole life, term life, universal life, indexed universal life, and variable life.

Whole Life Insurance

Whole life is a type of permanent policy. You generally pay the same premium amount throughout the life of the contract, and both the death benefit and cash value are predetermined (though subject to the insurer’s claims-paying ability). Whole life coverage lasts as long as the policy is in force.

After you purchase it, your main responsibility is to continue paying your premiums. You can typically access the cash value through policy loans or withdrawals, though doing so can affect the overall value and death benefit.

Universal Life Insurance

Universal life allows flexible premium amounts and timing, as long as the policy’s insurance costs are met. You can adjust your death benefit, and the policy grows cash value at an interest rate that can change over time.

Similar to whole life, you can often withdraw or borrow from the accumulated value, but this can reduce the policy benefits and possibly any guarantees.

Indexed Universal Life Insurance

Indexed universal life insurance is very similar to universal life insurance. It gives the policyholder a choice of allocating cash value amounts to a fixed account or a fixed-index account. You can pay premiums at any time, in almost any amount but subject to certain limits, so long as the policy expenses and insurance coverage cost are met.

The amount of insurance coverage can be changed. The cash value will grow at an interest rate declared annually and based on the performance of a stock index, which may vary over time. If there are any negative index changes, your cash value is protected. In these ways, it is similar to how a fixed index annuity functions: growth potential linked to rising index values and protection in the case of falling index values.

Indexed universal insurance policies typically guarantee the principal amount in the indexed portion, but cap the maximum return that a policyholder can receive. Since they’re seen as a “hybrid” universal life insurance policy, they tend to not be expensive (don’t have much management). They offer greater safety than an average variable universal life insurance policy, but their growth potential is limited compared to variable options.

Term Life Insurance

A term policy offers coverage for a set period—often 10, 20, or 30 years. If the insured dies within that term, the beneficiaries receive the death benefit. Should the insured outlive the coverage period, the benefit typically expires.

Term policies usually cost less in premiums since they don’t include a cash value feature, providing coverage strictly for the death benefit. A return-of-premium variant exists but comes with higher premium costs.

Variable Life Insurance

Like whole life, variable life involves a level premium and offers permanent coverage, but neither the death benefit nor the cash value is guaranteed—both can vary based on how investments (subaccounts) perform. Subaccounts are managed in different ways (stocks, bonds, etc.), and your choice of allocation can affect your policy’s value.

Why Get Life Insurance?

Four primary reasons motivate individuals to purchase life insurance:

Financial support for loved ones after the insured passes away
A component of a retirement savings strategy
Potential tax advantages
Access to funds for retirement, emergencies, or other needs

How Much Coverage Do I Need?

Several considerations come into play:

How many people rely on your income?
What is your current budget and how much can you spend on premiums?
What is the main purpose for taking out this policy?
Many individuals see life insurance as a substitute for their income in case of death, or for its tax benefits.

Consulting a licensed insurance professional is crucial for making informed decisions. For example, if you get a 20-year term policy in your 20s and later develop additional responsibilities, a new policy later on may cost more due to age and possible health changes. That’s why it’s wise to choose carefully from the start.

When to Get Permanent Insurance?

Permanent policies can help you grow savings and leverage your wealth over time. Because of higher premiums, they’re often more appealing to individuals with strong cash flow. They can be adapted as your situation changes and are designed to last for life, so long as premiums continue to be paid.

When to Get a Term Policy?

Term life might be better if you want coverage only for a set number of years, especially when working within a tight budget. Younger families often prefer term policies because the premiums are typically lower, and the greatest financial risks are during the early years of raising children.

Advantages: Whole Life vs. Universal Life

Whole Life Benefits:

Coverage remains active for life, provided you pay the premiums.
Premium costs remain the same throughout.
Cash value accumulates as a built-in “savings” element.
Some policies pay dividends.
Non-forfeiture features can help you maintain some benefits if you stop paying premiums.
Guaranteed features are in place as long as premiums are paid.

Universal Life Benefits:

Flexible premium amounts and payment frequency.
Adjustable death benefit, subject to insurance guidelines.
Option to make partial withdrawals from the cash value.
Often includes contract guarantees if minimum premium requirements are met.

Beneficiaries & Contingent Beneficiaries

A beneficiary is the individual or entity you choose to receive your policy’s death benefit. This often includes spouses, children, or other close relatives, but you can designate anyone (or even a charity). Naming a contingent beneficiary ensures someone else receives the benefit if the primary beneficiary passes away before you.