Life insurance has one basic purpose: to pay a death benefit to the policy beneficiaries when the insured dies. The policyowner pays premiums to keep the policy inforce and, in exchange, the life insurance carrier promises to pay the benefit.
There are three main types of life insurance:
Term Life Insurance
As its name states, term insurance only provides coverage for a specific period of time. You can buy term life insurance for 10, 15, 20, 25, or 30 years of coverage, however long you need depending on your situation. It’s the cheapest form of life insurance because it is only a defined coverage period, not your entire life, and does not have a cash-value aspect.
Whole Life Insurance
Whole life is a permanent type of insurance designed to provide coverage for your entire lifetime. Over time, a cash value balance is created within the policy that you can use when you find yourself in need of extra money. It is because of this cash value and the lifetime coverage that whole life insurance has higher premiums.
Universal Life Insurance
Universal life (UL) insurance is one of the most versatile types of life insurance. The policy can be used to provide coverage for a limited time like term insurance or permanently, until the death of the insured, like whole life. Universal life also earns cash value based on an interest crediting rate. A minimum interest crediting rate is guaranteed; the insurance company may use a higher interest crediting rate that is not guaranteed.
It’s important to know the different types of life insurance, so you can determine which type is best for your lifestyle. Because life insurance is such an important purchase, let’s also review some terms you should familiarize yourself with.
Life Insurance Definitions
Insured – The person the insurance policy covers. When the insured dies, the policy pays a death benefit. The insurance company evaluates the underwriting risk based on the insured’s physical condition and, in some cases, financial condition.
Policyowner – This is the person (or entity) that applies for life insurance and retains certain rights, such as having the freedom to change beneficiaries, and responsibilities, such as paying the premiums.
Beneficiary – The person(s) or party(ies) who receives the death benefit when the insured dies. The policyowner can name one person as a beneficiary, like a spouse or child, or multiple people, with the death benefit split into percentages until 100% of the death benefit is accounted for. The beneficiary can also be an organization or a charity that would receive the money from your life insurance policy when you die. Only the policyowner can name and change the beneficiary designation. With most policies, the beneficiary designations can be changed at any time.
See below for some examples on how these three roles can work.
Policyowner: John Smith (55 year old male)
Insured: John Smith (self)
- Jane Smith (50 years old, wife) 50% of death benefit
- Ellen Smith (25 years old, daughter) 50% of death benefit
Policyowner: Carter Sales Inc.
Insured: Sue Johnson (key person in sales)
Beneficiary: Carter Sales Inc.
Policyowner: Eliza Snow (40 year old female)
Insured: Tim Snow (10 year old, son)
Beneficiary: Cancer Foundation (charity)
Policyowner: McMillian Family Trust
Insured: Charlie McMillian
Beneficiary: McMillian Family Trust
Face Amount – Could also be referred to as the Death Benefit, Policy Value, Payout Amount, Face, or Proceeds. This is the amount of money those that you designate as beneficiaries will receive when you die.
Premium – Could also be referred to as the Payment, Cost, or Price. The premium is the amount of money you will have to pay to the insurance company to keep your insurance policy inforce, or active. Premiums can be made in multiple frequencies such as monthly, quarterly, semi-annually, or annually.
Expiration – The date in which your term policy will terminate and coverage ends.
Risk Class – The insurance company evaluates the applicant to determine the amount of premium required to cover the risk the insurance company assumes when the policy is issued. The risk class is the health classification they assign to the applicant which is typically based on height/weight, age, tobacco use, family health history and personal health history.
Table Rating – Table rating is a price increase applied on top of a risk classification based on your health and medical exam results.
Rider – A rider is a term used for any additional benefits or options you can add on to your policy. For example, a waiver of premium rider is an additional feature you can add to your policy to relieve you of your payments if you become disabled and can’t work.
If all these terms and definitions seem a little overwhelming, don’t fret. When you are looking to purchase a policy through Quotacy, our friendly agents are more than happy to go over your policy with you so you know exactly what you’re buying. If you aren’t exactly sure what type of policy is right for you, we can assist you with that as well. Contact us at your convenience or start by running a term quote. Window shop in peace – we don’t require any personal information to see quotes. We want you to feel confident and comfortable with your life insurance purchase, and that means not getting bombarded with pressuring e-mails and phone calls. Thanks for checking out Quotacy!