Life Insurance Basics

There are several different types of life insurance, all with a common purpose to protect your loved ones from bearing a large financial burden in the event of your premature death.Your needs will change throughout your life, so it's important to understand the basics, and periodically review your coverage to ensure that it's still right for you.There are two basic types of insurance — temporary insurance , which includes Term Life and Group Life, and permanent insurance , which includes Whole Life, Universal Life, and Variable Universal Life. If you purchase life insurance, when you die the insurance company will pay a death benefit to the beneficiary or organization named in the policy. (In the case of temporary insurance, your death must be during the policy term.)The choice between temporary and permanent insurance will depend upon your personal goals and objectives.

Temporary Insurance

  • Term Life is one of the simplest, most cost-effective types of life insurance. Generally, it provides the largest immediate amount of protection for the lowest cost.With Term Life, your beneficiaries are paid the entire amount of your policy (subject to your policy's provisions) if you die during the term, which is typically from 5 to 30 years.People who purchase Term Life generally have a substantial need for insurance protection during a specific period of time. They may be young and have growing families, and need temporary protection now with the option to convert to permanent coverage later.Ask your agent to compare rates from some of the country's top Term Life insurance providers.
  • Group Life insurance is typically offered as an employee benefit. Premiums under group policies are generally lower for younger employees, and higher for older ones.In addition to employers, some membership organizations such as unions and alumni clubs also offer Group Life insurance plans.

Permanent Insurance

  • Whole Life insurance combines the security of lifetime insurance protection with the advantages of tax-deferred cash accumulation.In addition to providing a death benefit, Whole Life policies also guarantee that premiums will remain level throughout the life of the policy. This allows owners to build the cost of their coverage into their long-term financial plans.People who purchase Whole Life generally want to ensure that when they die, money will be available to pay final expenses, fund college costs, pay estate taxes, care for an elderly parent, or simply allow loved ones to maintain their lifestyles.
  • Universal Life insurance combines the security of lifetime insurance protection with the advantages of policy flexibility and tax-deferred cash accumulation.The difference between Universal Life and other forms of permanent coverage is the flexibility it offers. Within certain limits, policy owners can increase or decrease their death benefit according to their changing needs without having to purchase a new policy. Likewise, owners can increase, decrease, or cease paying premiums altogether provided the policy has sufficient cash value.Like people who buy Whole Life insurance, people who purchase Universal Life generally want to ensure that money will be available to pay final expenses, help fund college costs, pay estate taxes, care for an elderly parent, or simply allow loved ones to maintain their lifestyle.
  • Variable Universal Life insurance (also known as "VUL") combines the security of lifetime insurance protection with the advantages of policy flexibility and tax-deferred cash accumulation through investments.The difference between VUL and other forms of permanent coverage is the flexibility and growth potential it offers. Policy owners determine how the assets within the policy are invested depending upon their tolerance for risk and the amount of time over which they will be investing.Within certain limits, policy owners can increase or decrease their death benefit depending on their changing needs without having to purchase a new policy. Likewise, owners can increase, decrease, or cease paying premiums altogether, provided the policy has sufficient cash value.People who purchase VUL generally want to ensure that money will be available to pay final expenses, help fund college costs, pay estate taxes, care for an elderly parent, or simply allow loved ones to maintain their lifestyle.They also like the idea of controlling how their cash values are invested and are willing to assume some market risk to create a life insurance program that adjusts to economic conditions.

Frequently Asked Questions

Why buy life insurance?
Many financial experts consider life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways: 

1. Income replacement
For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on. Proceeds from a life insurance policy can help supplement retirement income. This can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.

2. Pay outstanding debts and long-term obligations
Consider life insurance so that your loved ones have the money to offset burial costs, credit card debts and medical expenses not covered by health insurance. In addition, life insurance can be used to pay off the mortgage, supplement \retirement savings and help pay college tuition.

3. Estate planning
The proceeds of a life insurance policy can be structured to pay estate taxes so that your heirs will not have to liquidate other assets.

4. Charitable contributions
If you have a favorite charity, you can designate some of the proceeds from your life insurance to go to this organization.
How much life insurance do I need?
To decide how much life insurance to buy, you need to first figure out what your goals are in purchasing this coverage. Ask yourself the following:
  • Do I want to spare my loved ones funeral costs and outstanding debts?
  • Am I concerned that my spouse or domestic partner will not be able to continue to pay off the mortgage if I die suddenly?
  • Do I have dependents who count on my income?
  • Am I concerned about college savings for my children or retirement savings for my spouse if I die suddenly?

While all situations are different, here are two scenarios to help you think through the questions you should pose to your insurance professional:


If you have children, a spouse who does not work outside the home or aging parents who you financially support, you have dependents. Alternatively, you may simply have a spouse or domestic partner who would be unable to pay the mortgage without your financial contribution. In either case, your loved ones will no longer have your income to help them pay the bills and maintain their lifestyle after you are gone. You will have to purchase enough insurance to provide for their future, while considering how much of your budget should be devoted to life insurance.

Some insurance experts suggest that you purchase five to eight times your current income. While this may be a good way to begin estimating your family?s needs, you will also need to figure how much your dependents will need to pay for some or all the following:
  • Cost of owning a home (mortgage, maintenance, insurance, taxes and utilities)
  • College savings
  • Food, clothing, utilities
  • Child care
  • Nursing home or elder care
  • Retirement savings
  • Funeral expenses and estate taxes

Your family may also need extra money to make some changes after you die. They may want to relocate or your spouse may need to go back to school to be in a better position to help support the family.

No dependents

If you are young and plan to have a family in the future, you may also want to consider purchasing life insurance now so that you can lock in a good rate. Just because you don?t have dependents, does not mean you don?t have responsibilities. For instance, you may be concerned with not being an economic burden to others if you die unexpectedly. You may also want to leave some money behind to close family, friends or a special charity as a remembrance. In this case, you should purchase enough coverage to pay funeral and burial expenses, outstanding debts and tax liabilities, so that the bulk of your estate goes to your family, friends or charities.

Your insurance needs will vary greatly according to your financial assets and liabilities, income potential and level of expenses.
Are there different types of life insurance?

While there a many different types of life insurance policies, they generally fall into two categories – term and permanent.


Term Insurance is the simplest form of life insurance. It provides financial protection for a specific time, usually from one to 30 years. These policies are relatively inexpensive and are well suited for goals, such as insurance protection during the child-raising years or while paying off a mortgage. They provide a death benefit, but do not offer cash savings.

Purchasing term insurance is like renting a home. It is a short-term solution. Monthly costs are usually lower, but you will not be building equity. Just as many people rent (while saving to buy a home), individuals who need insurance protection now, but have limited resources, may purchase term coverage and then switch to permanent protection. Others may view term insurance as a cost-effective way to protect their family and still have money to put into other investments.


Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher. This type of insurance is good for long-range financial goals.

Purchasing permanent insurance is like buying a home instead of renting. You are taking care of long-term housing needs with a long-term solution. Your monthly costs may be higher than if you rent, but your payments will build equity over time. If you purchase permanent insurance, your premiums will pay a death benefit and may also build cash value that can be accessed in the future.
What is a beneficiary?

A beneficiary is the person or financial institution, (a trust fund, for instance) you name in a life insurance policy to receive the proceeds. In addition to naming a specific beneficiary, you should name a second or "contingent" beneficiary, in case you outlive the first beneficiary.

If there is no living beneficiary, the proceeds will go to your estate. If there are probate proceedings this could possible delay your loved ones receiving the money. The proceeds may also be subject to estate taxes.

Picking a beneficiary, and keeping that choice up-to-date, are important parts of purchasing life insurance. The birth or adoption of a child, marriage or divorce can affect your initial choice of who will receive the death benefit when you die. Review your beneficiary designation as new situations arise to make sure your choice is still appropriate.

Pay special attention to the wording of your beneficiary designations to ensure that the right person receives the proceeds of your estate. If you write "wife/husband of the insured" without using a specific name, an ex-spouse could receive the proceeds. On the other hand, if you have named specific children, any later-born or adopted children will not receive the proceeds - - unless the beneficiary designation is changed.
How often should I review my policy?
You should review all of your insurance needs at least once a year. If you have a major life change, you should contact your insurance agent or company representative. The change in your life may have a significant impact on your insurance needs. Life changes may include:
  • Marriage or divorce
  • A child or grandchild who is born or adopted
  • Significant changes in your health or that of your spouse/domestic partner
  • Taking on the financial responsibility of an aging parent
  • Purchasing a new home
  • Refinancing your home
  • Coming into an inheritance
Can I really "borrow" money from my life insurance?
If you have a permanent form of life insurance that has a cash value you may be able to obtain a policy loan from the insurance company. This is an advantage of permanent insurance — however, if you have any loans outstanding at the time of your death, they must be repaid or they will be deducted from your survivors' death benefit.
Will my insurance policy earn dividends?
Some insurance companies may share their profits in the form of dividends, as a feature on permanent forms of life insurance policies. They can be sent to the policyholder in cash, held by the insurance company to accumulate interest for the policyholder, used to offset premiums or used to purchase additional insurance.

In most cases, permanent insurance policies that pay dividends cost more than other policies.
How do I know which insurance companies are reputable?
Most insurance companies have financial strength ratings from independent organizations such as A. M. Best Company, Standard & Poors' and Moody's Investor Services.

Look for companies with "A" ratings or better. Your State Department of Insurance can provide you with information regarding the complaint history of various insurance companies.