Life insurance 101
Life insurance helps protect the most important people in your life. It can replace income, create inheritances, support charities, and more.
Get to know life insurance
Leave money to those you care about to cover anything—income, funeral costs, mortgage bills, education, and more.
Frequently asked questions
Answers to common questions
Besides generally providing a federal income tax-free benefit, it can help your retirement strategy by creating a potentially tax-free source of supplemental income.
There are two main types of life insurance: term, which covers you for a set period, and permanent, which may cover you for the rest of your life. (Both include different variations.) With term insurance, you choose the coverage period (typically 10, 15, 20, or 30 years) and make equal payments during it. Afterward, premiums usually rise. Permanent insurance stays in force as long as you pay premiums and can build value over time. Which to choose depends on factors like why you want coverage, how much coverage you need, how long you’ll need it for, and your budget.
Insurers calculate the cost of coverage partly by estimating “mortality”—the rate at which people die—based on age and health factors; the process of predicting it is called underwriting.
Generally, the younger and healthier you are, the less your policy will cost. Other factors, like tobacco use, health conditions, driving violations, risky behaviors or activities, and potentially dangerous jobs, might increase your cost. Also, you may pay less with a lump sum each year instead of installments.
Some life policies have set premium amounts paid at a specific frequency, like monthly or annually. If paid annually, it will typically be less. Other life insurance policies have flexible premiums; these are paid in varying amounts at different times. That means that you can change the amount of premium you pay (within limits) and when you pay. The policy will stay in force as long as its value is enough to pay its costs and expenses.
Consider:
- Your goals. Build cash value? Cover final expenses? Add to your overall financial strategy?
- Your coverage needs. This calculator can help you determine the right amount for you.
- Your budget. Knowing what you can afford will help you find the right policy at the right price.
- Your beneficiaries. You can name an individual, divide payouts among relatives, or leave them to friends, charities, or your estate.
- Potential needs before you die. Some policies have “living benefits” you can access while you’re alive.
What terminology do I need to know?
To improve your understanding of life insurance, here are some terms you should be familiar with:
Premiums
These are the payments you make to the insurance company. For term life policies, these cover the cost of your insurance and administrative costs. With a permanent policy, you’ll also be able to allocate these payments into an account that has cash value.
Beneficiaries
The people who receive money when the covered person dies. Beneficiaries are often spouses, children or parents, but they can also be friends, charitable organizations or others that you may choose.
Death benefit
The total amount of money the beneficiaries receive when the covered person dies. You choose a cash value when you buy a policy, and the amount is sometimes — but not always — a fixed value. Permanent life insurance can also pay additional money if the cash account has grown, and you selected certain options for your policy.
Riders
These are optional additions you can make to your life insurance to provide specific coverages and tailor your policy to your needs, such as providing benefits if you become chronically ill or disabled, need additional death benefits, cash value or estate planning assistance. Some riders are available for an additional cost.
Get to know your policy choices
The fine print
Footnote
1 You can access your cash value through loans and withdrawals. In general, loans are charged interest; they are usually not taxable. If a policy lapses or is surrendered, the loan becomes immediately taxable to the extent of gain in your policy. Withdrawals are taxable only when you take more money out of the policy than you’ve paid in premiums. If your policy becomes a Modified Endowment Contract (MEC), different, less advantageous tax provisions apply. Loans and withdrawals may reduce or eliminate the death benefit payable to your beneficiaries.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. If you would like information about your particular investment needs, please contact a financial professional.
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