Life insurance is a contract between the policyholder and an insurance company. A policyholder makes premium payments in exchange for a policy’s financial protections. If the policy owner passes away while the policy is in force, the beneficiaries collect a death benefit, sometimes called face value or face amount.
There are two primary types of life insurance: term and permanent.
Term Life Insurance Policies
Term life insurance lasts for a set period of time. Policies typically are in force for 10, 20 or 30 years, but some may be as short as a few months or, in a few cases, up to 40 years or more. Premiums are level, meaning they won’t change during the policy term.
As a rule, term policies are cheaper than permanent policies because they don’t have savings or investment components, known as cash value. However, the older you are, the more you’ll typically pay for a policy.
Permanent Life Insurance Policies
Permanent life insurance provides coverage for a policyholder’s entire life as long as premiums are maintained. Permanent life insurance policies have a cash value component, which applies a portion of the paid premiums to an investment account that grows tax-deferred. This acts as a forced savings account; you can borrow or withdraw from it under some circumstances. For these reasons, permanent life insurance typically has higher premiums than term life insurance.
Whole life insurance policies are permanent policies with fixed premiums with cash value growing at a specified rate.
With universal life insurance, the premium and death benefit can be adjusted, allowing the policyholder some financial flexibility if their budget or needs change over time. The cash value component of universal life insurance grows at money market rates. You could potentially earn more than you would with a whole life policy that grows at a fixed rate.
An indexed universal life policy’s cash value growth rates are linked to the performance of certain financial indexes such as the S&P 500 or others.
Life insurance policies offer ways to customize coverage through riders. Sometimes called add-ons, riders let you access some of the cash value if you have a terminal or critical illness, which is an important feature with a pre-existing condition.
