The Basics of Life Insurance

Understandably, the prospect of searching for life insurance can be somewhat intimidating. Adults now understand that high school did not adequately prepare us for the financial struggles ahead. I doubt very seriously that any high school has a life insurance 101 course to explain its importance. For most of us, we learned about financial preparation, the dos and don’ts if you will, from our parents, which they learned from their parents—so on and so forth. 

This creates a funnel effect that tapers fundamental financial literacy down to a pinpoint. Unfortunately, a lack if focus on financial literacy makes us miss out on the changes in the market. 

For example, 100 years ago there were far less options in the life insurance market than there are today. Therefore, life insurance was not deemed a significant tool used for financial acceleration. Today we have learned that life insurance is not only one of the best tools for accelerating finances, creating an estate, protecting loved ones, and leaving behind a legacy, it also takes the risk and guesswork out of investing.  

When speaking with individuals who are interested in life insurance. I often get the question: why do I need life insurance? I respond by asking them a question: “do you have insurance on your vehicle?” They usually respond, “yes.” If asked why? They reply with something to the effect of: “if I lost my vehicle right now I would need another one quick! Losing my vehicle would impact my livelihood and the ability to provide for my loved ones.” Their response begs one more simple question: “do you think that losing your life would impact your loved ones less than losing your vehicle?”

So, what is life insurance? Life insurance is a personal contract with an insurance company that promises to pay a benefit to your beneficiaries or estate in the result of your untimely passing. This promise of payment is in exchange for smaller monthly, quarterly, or annually payments. This personal contract is a unilateral contract, which means that the insurance company is the only party that is legally obligated to pay. While there are many types of life insurance, everyone should be familiar with the two most common types of life insurance, whole life insurance and term insurance.  

Term Life Insurance 

Term life insurance is the simplest type of life insurance. Term life insurance policies offer a death benefit and remain in force for only a specific period or term. No death benefit is payable if the insured dies after the term expires. The term could either reference a specific number of years such as 10, 20, 30 years or a specific age such as term to age 65 or term to age 70. 

Whole Life or Permanent Insurance 

Whole life insurance is designed to remain in force for the whole life of an insured and the premiums will never increase. The purpose of level premiums with whole life policies is to make life coverage affordable at an older age. The insured overpays when they are young and underpay when they are elderly. Cash value is a part of whole life insurance and reflects the reserves necessary to ensure payment of guaranteed death benefit. The cash value increases steadily over time, over the life of the contract because it is regularly credited with a guaranteed level rate of interest.  

Life insurance, at its simplest, is designed to protect loved ones from a financial disaster e.g., the loss of the bread earner. Life insurance when utilized to its full potential is a vital tool that can secure financial growth and accelerate financial success. Life insurance is legacy creation! One simple tool can ensure that the next generation of your family has the financial freedom to ensure success for generations to come.

Ryan Begley, Benefits Specialist