In its most basic form, life insurance provides an amount of money to your beneficiaries when you die. However, there are several forms of life insurance, and some policies provide more than just coverage.
Definition of life insurance
Life insurance covers a person’s entire life. If they die while the insurance is active, the insurer will pay a claim to the listed beneficiaries. You can designate any person or entity as a beneficiary, including a child, spouse, or trust. The payout, also known as the life insurance death benefit, is normally equal to the policy’s whole coverage. For example, a $500,000 whole life policy will pay $500,000 to its beneficiaries. If there is no nominated beneficiary, the payment will be sent to your estate.
To keep your insurance coverage active, you must pay insurance premiums, just like any other sort of insurance. Premiums can be paid in monthly, annual, semiannual, or quarterly installments, or all at once. Certain types of life insurance include a savings component known as cash value, which you can access while you are still living.
Term life insurance definition
Term life insurance works by providing coverage for a set length of time, such as ten or twenty years. You can select a term length that meets your needs, and if you die during the term, your beneficiaries will get the payout. When your term life insurance coverage ends, you can purchase a new policy or consider your choices. Ideally, by the conclusion of the term, you will no longer require life insurance because your house mortgage will be paid off, your children will be grown, and you will have money in the bank. Term life insurance policies are frequently the most affordable sort of coverage. In some situations, you can purchase life insurance online without taking a medical exam. However, term coverage does not increase monetary value.
Annual renewable term life is one year, with the option to renew the policy each year. However, premiums often rise when you renew. If you require more than a one- or two-year term, you might be better served with a set five- or 10-year term policy.
Permanent life insurance definition
Permanent life insurance coverage often lasts your entire life. They normally accumulate cash value, which can be withdrawn or borrowed against while you are living. Whole life insurance is the most often used type of permanent life insurance.
Whole life insurance definition
Whole life insurance, like other permanent policies, provides both everlasting coverage and a cash value component. However, the biggest advantage of whole life insurance is its guarantees. Whole life premiums are guaranteed to remain constant throughout the policy’s term, the cash value rises at a set rate, and the death benefit remains constant. If you have a “participating” policy with a mutual life insurer, you may be able to receive dividends dependent on the company’s financial performance. Dividends can be utilized to increase your cash worth or to cover premiums.
Universal life insurance definition
Universal life insurance is a sort of permanent coverage that is more adaptable than whole life. You can raise your premiums to assist improve the policy’s cash value, or lower them if the cash value is sufficient to pay the difference. You can also increase or decrease the amount of coverage if your insurance requirements change. To boost coverage, you may need to undergo a life insurance medical exam. Unlike whole life, universal life’s cash value is usually connected to an interest rate disclosed by the insurance provider, which can change.
Indexed universal life insurance definition
Indexed universal life insurance functions similarly to universal life insurance, except the cash value is usually linked to a stock index, such as the S&P 500. The same flexible coverage applies: you can vary your premiums and death benefit as your circumstances change.
Variable universal life insurance definition
Variable universal life insurance provides the same flexibility as universal life. You can change your premiums and death benefit. However, you can link cash value to a broader choice of investments, including mutual funds.
Definitions: Common life insurance terms
You may come across these terms while shopping for life insurance. This is what they mean.
Beneficiary: The person or people you choose to receive the life insurance benefit when you die.
Carrier: An alternative name for a life insurance firm.
Cash value: Permanent life insurance policies often include a savings part that grows in value over time. This is referred to as the cash value, and once you’ve accumulated enough of it, you may be able to withdraw or borrow money from your policy.
Death benefit: When you die, the insurance will give your beneficiaries a death benefit, which is typically income tax-free.
Dividend: Some insurers are mutual firms, which means they are partially owned by their policyholders. They may pay out a quantity of money to certain policyholders each year dependent on the company’s financial success. These payouts are known as dividends.
Exclusions: Situations in which your life insurance policy will not pay out, such as death from a hazardous activity like skydiving. Exclusions differ by insurer and are detailed in the policy documents.
Face value: The basic death benefit of the policy. For example, if you buy a $500,000 policy, your life insurance face value is $500,000.
Insured person: A person whose life is insured. This does not need to be the same individual as the policyholder.
Policyholder: The individual who owns the life insurance policy.
Premium: The amount of money you’ll pay to keep your life insurance policy active. With most policies, you can pay monthly, quarterly, semiannually, or annually.
Rider: A life insurance rider is an optional add-on that allows you to personalize your coverage.
Underwriting: Life insurance underwriting is the process by which an insurer gathers information about you and determines your premium.
