Life Insurance is a contract between you and an insurance company, allowing you to plan long-term and provide your loved ones with the financial support they may need in case anything happens to you.
When looking broadly at how Life Insurance works, there are three core terms you should be aware of:
Premiums: The policyholder pays the insurance company premiums, or payments, during their lifetime.
Death Benefit: These premiums are paid in exchange for a guarantee that upon death, the insurance company will give a sum of money, known as a death benefit.
Beneficiaries: The death benefit is given to named beneficiaries. Beneficiaries can include a person, business, or non-profit organization. It’s important to note that the insurance company can only hold their guarantee if the policy holder pays their premiums
As part of our glossary series, we are on a mission to make Insurance more approachable. This means defining some of our jargon. Here are a few Life Insurance terms that frequently spark question marks.
Annuity: If you’re ever concerned that retirement may not provide enough financial stability, this Life Insurance policy may be a helpful tool. An annuity is a contract between you, the insured, and a Life Insurance carrier. The insured agrees to pay an amount of money through periodic payments. The annuity functions like a savings account that will eventually allow the insured to receive monthly or yearly payments at an agreed future date for an agreed length of time. This way, you will have guaranteed income at a later date.
Permanent Life Insurance: This type of coverage is in effect “forever” or as long as the policy holder is alive, and of course, pay their dues. Under this broad term, there are several types of permanent policies (two of the most popular being Whole Life and Universal). However, typically an attractive feature to all permanent policies is not only the “death benefit,” but also the “living benefit.” This is a tax-free savings account that the policy holder can use or borrow against during their lifetime.
The cost of Life Insurance is directly linked to your age, medical history, gender, hobbies, and more. In general, there are four broad ratings based on several factors—Tobacco User, Standard Non-Tobacco User, Preferred, and Preferred Plus.
Term Life Insurance: This type of coverage provides financial protection for a specified length of time, known as a “term.” If the insured dies during the term, and the policy is active (in other words, payments have been made), then their beneficiary will be paid. This type of Life Insurance is competitive because once the term has been selected, a monthly rate is locked in. This means that the insurance company cannot change the price of your premium until the completion of your term. A 20-year term is popular with young parents as its believed children will no longer be a financial burden at age 20, but it’s important to know that recent research indicates adult children are not financially independent until age 29, on average.
Universal Life Insurance: This type of permanent Life Insurance offers a bit more flexibility. As the policy holder, you can reduce/increase your death benefit and pay premiums at flexible times and amounts (subject to certain terms). Part of your payments go into an investment account, where they can earn interest based on market conditions.
Whole Life Insurance: This type of permanent Life Insurance runs for the entirety of the policy holder’s life or until the ultimate age on the mortality table (usually 120 years young). Consistently priced premiums indicate a higher cash value and death benefit.
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