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Life Insurance Basics
What is Life Insurance?
Life insurance a contract between the policyholder (you) and the insurance company where you trade an amount of money (premium) for an amount of coverage (death benefit) that would pay out to the beneficiaries (family, charity, business, etc.) if the individual (insured) passed away while the policy is active.
The two main types of coverage are ‘term insurance’ and ‘permanent insurance’. Term insurance is where you are protected for a certain period of time, while permanent insurance where you are protected for your entire life.
Parts of a Life Insurance Policy
- Insured: The individual whose life is covered on the policy. It is possible for someone else to be owner of the policy but they have to a vested interest in the insured (spouse, parent, business partner, etc.)
- Beneficiary: The individual(s), business, charity, trust, etc. that receive the proceeds if the policy pays out. There can be one or multiple beneficiaries on a policy.
- Death Benefit: The amount of money that gets paid to the beneficiaries. This payment is usually paid out on a tax-free basis assuming it is structured properly.
- Premium: The payment that is made to the insurance company in exchange for protecting the insured’s death benefit. If the premium stops, the coverage goes away.
Calculate how much coverage you need
Importance of Life Insurance
People need protection life insurance provides for various reasons
Financial Protection
Debt Repayment
Estate Planning
Business Continuity
Funeral Expenses
Income Replacement
Types of Life Insurance
Term Insurance
Term insurance is the most common life insurance purchased by individuals. It is a good, budget-friendly solution when you need the coverage most, like having a mortgage or young children. Most term insurance policies are for periods between 10 and 30 years.
Compared to permanent insurance, it costs on average about 90% less but does not build any cash value.
| Age | Gender | $500k (20 yr term) |
|---|---|---|
| 25 | Female | $18.03/month |
| 25 | Male | $23.08/month |
| 35 | Female | $21.82/month |
| 35 | Male | $25.55/month |
| 45 | Female | $42.01/month |
| 45 | Male | $54.21/month |
| 55 | Female | $96.15/month |
| 55 | Male | $132.87/month |
*20 year term quotes for a healthy individual from 4 different insurance companies (Banner Life, Protective Life, AIG, and Pacific Life)
| Age | Gender | $500k (Life Paid-Up at 99) |
|---|---|---|
| 25 | Female | $408.99/month |
| 25 | Male | $461.78/month |
| 35 | Female | $587.96/month |
| 35 | Male | $644.61/month |
| 45 | Female | $846.31/month |
| 45 | Male | $920.13/month |
| 55 | Female | $1239.00/month |
| 55 | Male | $1351.01/month |
*quotes for a healthy individual from Guardian Insurance company
Permanent Insurance
Permanent insurance is purchased by individuals who are looking to have coverage for their entire life. Although it requires more cash flow than term insurance, it has some benefits that are only available to whole life policyowners.
High income earners may use permanent life insurance as a bond-alternative and to help with estate taxes.