LIFE INSURANCE 101
Life Insurance: Understanding the Basics
Life insurance is a contract between an individual and an insurance company, where the insurance company agrees to pay a specified amount to the individual's beneficiaries upon their death.
The payment made by the insurance company is called a death benefit. The individual pays regular premiums to the insurance company to maintain the coverage.
Why Do I Need Life Insurance?
Life insurance is an essential aspect of financial planning. It provides financial security to an individual's family and loved ones in case of their untimely death.
The death benefit can be used to pay for end-of-life expenses, mortgages, or even to provide a source of income for the beneficiaries. It also helps to ensure that one's dependents will be taken care of, even after they are gone.
(1.) “2021 Insurance Barometer Study,” Life Happens and LIMRA, March 2021
(2.) “The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit,” National Bureau of Economic Research, August 2019
(3.) “Life Insurance Ownership Drops to 57-Year Low,” Life Insurance and Market Research Association, September 2020
Types of Life Insurance
There are two primary types of life insurance: term life insurance and permanent life insurance.
Term life insurance provides coverage for a specified period of time and pays out a death benefit only if the individual dies within that time frame. This type of life insurance is typically less expensive than permanent life insurance and provides protection for a specific need, such as covering a mortgage or providing income for dependents.
Permanent life insurance, on the other hand, provides coverage for an individual's entire lifetime and accumulates a cash value over time. There are several types of permanent life insurance, including whole life insurance, universal life insurance, and indexed universal life insurance.
Typically between 1 and 30 years
Lifetime of the Insured, or until policy maturity
Typically lower than permanent
Cost of Premium
Generally higher than term life
Fixed premium during the term of the policy
Type of Premium
Level premium, can be adjusted based on policy investment performance
No cash value component
Cash Value Component
Has a cash value component that grows over time
Yes. Varies by policies
Yes. Varies by policies
■ Level Term Life
■ Renewable Term Life
■ Decreasing Term Life
■ Return-of-Premium Term
■ Whole Life
■ Universal Life
■ Variable Life
■ Indexed Universal Life
What is Indexed Universal Life Insurance?
Indexed universal life insurance (IUL) is a type of permanent life insurance that combines the death benefit protection of traditional life insurance with the potential for cash value growth through investments linked to a market index.
Here are some key features of an IUL policy:
Cash value growth: The policy’s cash value is tied to the performance of a specific market index, such as the S&P 500. If the index performs well, the cash value grows at a higher rate than traditional universal life insurance policies.
Protection against market downturns: While the cash value of an IUL policy is tied to an index, it typically has a floor of 0% or a minimum interest rate, which protects the policy from negative returns in down markets.
Flexible premiums and death benefits: IUL policies offer flexibility in premium payments and death benefit amounts, allowing policyholders to adjust their coverage as needed throughout their lives.
Tax-free death benefit: Like all life insurance policies, the death benefit paid out to the policy’s beneficiaries is generally tax-free.
Tax-deferred cash value growth: The cash value of an IUL policy grows tax-deferred, meaning policyholders can withdraw or borrow against the cash value without incurring immediate taxes.
Policy loans and withdrawals: Policyholders can access the cash value of an IUL policy through loans or withdrawals, but any outstanding loans and withdrawals will reduce the death benefit and cash value of the policy.