If you landed on this page, it’s most likely because you are looking to figure out the very basics of life insurance. Life insurance is a large concept with many different terms and products. So below we’ll look at the basics of what a life insurance policy is, which different types there are, and when you’d want to look into each type.
What is a Life Insurance Policy?
To put it simply, a life insurance policy gives a certain amount of money after you pass away to the people you designate as your beneficiaries. The money that goes to your beneficiaries is what is known as a death benefit. It’s common to see death benefits run around $100,000 to $250,000 or above. They can also go much lower, at around $5,000 to $30,000. You might also see these amounts referred to as your coverage.
Where some policies get a little more complex is that certain types build up a cash value. This is money earned in interest on top of the base death benefit itself. You can often borrow or withdraw against this amount.
To illustrate the concept of a life insurance policy, we have a sample illustration for a whole life policy. This is a permanent life insurance type that builds cash value at specific intervals. The sample policy is for a man who started the policy when he was 45 years old. The base coverage amount is $150,000. He pays a monthly premium of $234. Below you can see how the cash value increases and the total death benefit goes up. Death coverage is roughly equal to base coverage ($150,000) plus net cash value.
|Year||Age||Annual Premium Payment||Dividends||Net Cash Value||Total Death Benefit|
You can see how a plan like this grows wealth over time. By the time the man is 70 years old, he has a cash value of $85,152.
Types of Life Insurance Policies
The main two types of life insurance are term life and permanent life insurance. A term life insurance policy lasts for a specific amount of time, such as 10, 20 or 30 years. Then you have to renew it and pay a higher premium. A permanent policy means no renewing the plan, you have lifelong coverage as long as you pay your premiums, which means you don’t have to undergo the risk of premiums going up.
Permanent life insurance subtypes get a bit more complicated. These include:
- Whole life: This is a type of policy that grows cash value at certain intervals.
- Indexed Universal Life: This type of policy grows cash value in line with how certain markets perform, like the S&P 500.
- Variable Universal Life: This type of life insurance allows you to invest your cash value into stocks and bonds.
- Guaranteed Universal Life: This type of life insurance has a fixed death benefit and premium; it is not focused on a cash value component.
Be sure to check out the links above to see our complete guides on each type in more detail.
Who is a Life Insurance Policy For?
Basically, life insurance is for anyone who wants to better protect their own financial future and the financial future of their dependents. Below we’ll look at which life insurance policy type fits with a few common financial goals.
- You want to provide financial stability for dependents in case you pass away: term life or guaranteed life would be best, as these have no cash value and only focus on the death coverage.
- You want to supplement your savings in any way, such as helping with a college fund or saving for retirement: whole life, variable universal life, or indexed universal life all grow cash value.
- You have specific short-term goals in mind, such as if you are a senior and want to save for final expenses: you may want to look into focused plans like whole life and guaranteed universal life insurance.
It also pays to talk to an insurance agent or broker, who can guide you towards certain options that may be best for your financial situation.
How Much does a Life Insurance Policy Cost?
The cost of a life insurance policy depends on several factors. Below are the main ones:
- Age: The younger you are when you buy life insurance, the cheaper it is
- Health: The better your health is, the less expensive your life insurance policy cost
- Lifestyle: Since your lifestyle affects your health condition, the more active your health style is, the cheaper your life insurance costs.
- Gender: It is commonly known that women tends to live longer than men, therefore their life insurance policy should cost less than that for men.
- Policy coverage or face value: $1 million life insurance policy will cost a lot more for the same person than a $200,000 policy.
- Cash value or annual retirement withdrawal or loan: If you plan to use your life insurance policy, especially indexed universal life or variable universal life to supplement your retirement income, the amount you plan to withdraw annual during your retirement will affect the cost significantly.
- Last but not least, the type of life insurance policy affects the cost significantly:
- Term life is usually much cheaper, usually around $30-100 for a 30-year-old healthy individual. Learn more How Much Term Life Insurance Costs
- Universal life policies are very reasonable for the great benefits they bring. See How Much does Universal Life Insurance Cost?
- Whole life is terribly expensive and might not suitable for many people. See How Much does Whole Life Insurance Cost?
Finding the right life insurance policy for you can be stressful and overwhelming. However, once you know the main types, it’s easy to see which plans were made for certain financial goals.
Here’s a quick way to think about it. If you want to just focus on a death benefit after you pass away, choose a type without a cash value. If you want to grow wealth and supplement savings, look into a plan with a cash value component.
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