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Last Updated: September 2022
An Introduction to Life Insurance
Life insurance is an affordable way to financially support your loved ones in the event of your untimely death.
In a traditional life insurance contract, a life insurance company agrees to provide a lump sum payout to a customer’s loved ones in the event of the customer’s death during a set period of time. In exchange for this payout, the customer agrees to pay monthly installments to the insurance company for the life of the coverage contract.
Life insurance coverage is usually restricted to specific lengths of time, known as terms. For example, a customer may agree to sign a life insurance policy for a term of 10 years. A customer’s coverage and premium payments would only last for these 10 years.
In order to be considered for life insurance coverage, customers must apply. During the application process, a life insurance company may ask a potential customer for personal information, medical records, and other identifying information. Traditionally, life insurance companies would require applicants to receive a health exam before offering coverage. Nowadays, life insurance providers have mostly done away with the medical exam requirement—just like the companies listed in our chart above.
Here are some common definitions you’ll need to understand while browsing life insurance providers:
Types of Life Insurance
Life insurance providers mainly offer two types of life insurance products.
The more common of the two life insurance products, a term plan is one that only exists for a set amount of time. While a term is active, a customer pays monthly premiums and receives financial coverage in the event of their death. Once the set term has ended, both coverage and premium charges also end.
As they incur less risk on the end of the life insurance provider, term life insurance is much cheaper than whole life insurance. For every $7 a customer pays toward a term life premium, the same coverage would cost $100 for a whole life plan.
It’s important to understand that term plans have no cash value. The premiums paid into a term plan do not accrue in the market, they go straight to the insurance provider. A term plan can usually be canceled, but the premium charges can not be recollected by a customer.
Whole life insurance does not carry a term limit, meaning coverage extends until the death of the customer (as long as the customer continues to pay their premiums until their death.)
In addition to the death benefit payout, whole life insurance products carry a cash value accumulation. As customers pay monthly premiums, some of this money is invested into the market, gaining value over time.
It’s important to understand that, under most whole life insurance contracts, the customer’s beneficiaries cannot receive both the death benefit and the cash value accumulation.
Why Life Insurance Matters
The primary goal of life insurance is to provide a financial safety net to the people in your life who depend on your current income. Beneficiaries often include spouses, children, and parents or grandparents, but just about anyone can receive a slice of your payout as you see fit.
When deciding on whether or not to purchase life insurance, ask yourself two primary questions:
If the answer is “yes” to either question above, a life insurance policy may be right for you.