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Life Insurance

What is Life Insurance?

Life insurance is a contract between you and an insurance company. In exchange for premium payments, the insurance company pays a death benefit to your beneficiaries when you pass away. Life insurance typically covers natural and accidental deaths. Some policies also offer “living benefits,” which means they pay out a portion of the death benefit while you are still alive if you are diagnosed with a covered chronic, critical or terminal illness.

There are basically two types of life insurance: term life and permanent life. Term life covers you for a fixed amount of time, while permanent life insurance can cover you until the end of your life.

Generally, term life insurance is less expensive than permanent life insurance. Permanent life policies build cash value over time and do not expire, if you have paid the premiums.

How Does Life Insurance Work?

Life insurance covers the life of the insured person. The policyholder, who can be a different person or entity from the insured, pays premiums to an insurance company. In return, the insurer pays out a sum of money to the beneficiaries listed on the policy when death occurs.

What Does Life Insurance Cover?

The main purpose of life insurance is to provide money for your beneficiaries when you pass away. But how you pass away can determine whether the insurer pays out the death benefit. Depending on the type of policy you have, life insurance will provide coverage for:

  • Natural deaths: Dying from a heart attack, disease or old age are examples of natural deaths.
  • Accidental deaths: Accidents may include car crashes, drowning or poisoning.
  • Suicide: Most life insurance policies cover suicide, but only if it occurs after the policy's waiting period - typically the first two years of the policy.
  • Illness or injuries: Some policies offer coverage for illness or injuries while you are still alive. For example, a critical or chronic illness rider can provide a benefit for illnesses such as cancer, as well as conditions that permanently inhibit your daily activities. An Accelerated Death Benefit rider provides access to your death benefit if you are diagnosed with a terminal illness.
  • War or terrorism: Some life insurance policies may exclude death as a result of war or terrorism.

How Does Term Life Insurance Work?

Term life insurance covers you for a period of time chosen at purchase, such as 10, 20 or 30 years. If you pass away during the covered period, the policy will pay your beneficiaries the amount stated in the policy. If you do not pass away during that time, no benefit is paid.

Term life is popular because it offers benefits at a lower cost than permanent life insurance.

There are some variations of typical term life insurance policies. Convertible policies allow you to convert them to permanent life policies without new medical underwriting, at a higher premium.  This allows for longer and potentially more flexible coverage. Decreasing term life policies, such as mortgage protection insurance, have a death benefit that declines over time.  This is often done in coordination with covering large debts.

How Does Permanent Life Insurance Work?

Permanent life insurance policies typically cover you until you pass away, assuming you pay your premiums. Whole life is the most well-known type of permanent insurance, but there are other variations, including universal life, indexed universal life and variable life.

Permanent life insurance policies build cash value over time. A portion of the premium payment is added to the cash value, which can increase based on which type of policy you have.

The cash value of whole life insurance policies grows at a fixed rate (not including dividends), while the cash value within universal policies can fluctuate.

You can use the cash value of your life insurance while you are still alive. You can borrow from it, make withdrawals, or use the money to cover future premium. If you no longer need coverage, you can cancel the policy and receive the cash surrender value in return.