Life Insurance 101: What You Need to Know
The life insurance industry is booming. According to The American Council of Life Insurers (ACIL), “90 million American families rely on life insurers’ products for financial and retirement security.” Among these products, “individual life insurance protection in the United States totaled $12 trillion at the end of 2017 and has grown at an average annual rate of 1.5 percent since 2007.” That’s a lot of policies and a lot of money. In case you’re wondering whether you should buy your own life insurance policy, here’s a quick overview of what you should know:
A Brief Definition of “Life Insurance”
Life insurance is a type of warranty against financial difficulty for your loved ones should you unexpectedly die. As a policyholder, you enter a legal contract with an insurer, who agrees to pay a benefit to your designated beneficiaries upon your death. In turn, you agree to pay a premium (usually in installments) to the insurer for a specified amount of time.
The Two Major Types of Life Insurance
Basically, life insurance can be underwritten for specific groups of people — such as the employees of a company — or for individuals. It can also be categorized as either “term life insurance” or “whole” (also called “permanent”) life insurance. The ACIL reported in 2016, “about 4.3 million individual life insurance policies bought were term and about 6.4 million were whole life.” Let’s take a look at the differences between the two:
Term Life Insurance
Term insurance is the most basic type of life insurance, as well as the cheapest. Insurers only pay out a death benefit if you die during the policy term. Most term life insurance policies offer coverage for 10, 20 or 30 years and are meant to cover your household expenses should you die prematurely during that time. Term policies do not hold any cash value, and their premiums may or may not increase as the policy ages. Typically, once kids are grown and retirement looms, people opt to discontinue term life insurance coverage because they have fewer expenses and more savings to cover any unexpected death and loss of income.
Whole Life Insurance
Unlike term life insurance, whole life insurance provides lifelong coverage, guaranteeing that your beneficiaries receive a set payout upon your death at any age. You agree to pay a fixed premium for as long as you live, with your contributions also accumulating a cash value over the years. Insurers invest your contributions, and you are permitted to borrow against their sum once it reaches a certain amount. These types of policies have more stringent qualifications for purchasing, generally contingent on the results of a medical exam.
Which Type Should You Choose?
Choosing one type of life insurance over the other depends on several variables. Your age, health and current financial security are just a few of them. Speaking to a qualified financial advisor can guarantee that you have the information you need to critically access all of your choices. Good ones use market research insights to stay abreast of market conditions and consumer needs, making them especially equipped to offer you sound financial advice and help you decide on the best policy for your needs.