Life Insurance 101: Understanding the basics


Life insurance policies may seem very straightforward, but that isn’t always the case. There is a lot of information regarding the different types of policies, but don’t worry; we’re here to help you get a better understanding of what it is.

The Basics: Key Life Insurance Terms You Need to Know

While there are several different types of life insurance policies, there are three very popular options: Term Life Insurance, Whole Life Insurance and Universal Life Insurance.

These types of insurance policies have one big thing in common: the longer you wait to sign up, the more expensive it will be. Before diving deep into more information, here are some basic terms that you need to know when talking about life insurance. 

Premiums are the payments being made by you to the insurance company in exchange for your policy.

Beneficiaries are the person or people –of your choosing– that will receive a cash payment when the covered person dies.

Death Benefit (or policy payout) is the total amount of money (lump sum) that the insurance company will pay out once the covered individual passes away.

How Does Life Insurance Work?

Life insurance is a tool for you to keep your loved ones covered financially in case you pass away during your earning years. 

How it works is simple: The individual (you)pays a yearly premium, and the insurer pays a lump sum known as a death benefit to your beneficiaries after your passing. That lump sum payment could be used for whatever the recipients of the payout would like. The amount of that payout depends fully on you and how much premiums can you pay.  

There is a very well known misconception that life insurance policies should be treated like an investment or savings accounts and that those yearly premiums will eventually generate a profit (The death benefit) to your loved ones after your gone.There are actually much better ways to invest your money (ranging from low risk to high risk opportunities) that will generate better profits and will have the same tax benefits. The only reason to keep a life insurance policy is to make sure your income could be replaced and your loved ones covered financially.  

Term Vs. Whole Vs. Universal Life Insurance

You have most likely come across three main types: Term Life Insurance, Whole Life Insurance and Universal insurance.  

While death benefits can be similar (both types of policies –generally– have tax-free death benefits), they do have key differences that make one differ from the other quite a bit.

Term Life Insurance is the easiest to understand, as it’s the most straightforward of the two. It has a term of 10, 20, or 30 years and is the less expensive life insurance policy option. It’s typically easier on your pocket in the short run, but it doesn’t have a cash value component. Once the term is up, there’s is no type of payout. Essentially, they have no value if you happen to outlive the term of your policy.

Whole Life Insurance is usually the more expensive option, but it also offers additional benefits. For example, if you pay your premium while you’re alive, the policy will not expire and it builds cash value over time and the death benefit is guaranteed.

So, although Whole Life Insurance is more expensive in the short run, there’s a payoff and there aren’t any term limits to worry about. 

Universal Insurance is the more versatile type of life insurance. It offers permanent coverage (like whole life insurance), but you can make lower or higher payments depending on how well the insurance company’s investments do. 

If they do well, you may be able to stop making payments altogether. If they do poorly, you may have to make higher payments.

What if I need cash now?

If you have either a whole life insurance or a universal lifelife insurance policy, there is an option of cashing out your life insurance policy with a payout that you can use in life for any need, called a life settlement (For example, medical treatments, mortgage payments, etc’). How much you get from your policy depends on many factors, you can read more here. Is this option relevant for you? Get more information here