What is Life Insurance?

Life insurance is a form of coverage that pays out a sum of money either upon the death of the insured individual or after a predetermined period of time. There are several common types of life insurance, including:

1. Term Life Insurance: This type of life insurance provides coverage at a fixed rate of payments for a limited period of time, known as the term. After the term expires, coverage at the previous rate of premiums is no longer guaranteed, and the policyholder must either forgo coverage or obtain further coverage with different payments or conditions. If the insured individual dies during the term, the death benefit will be paid to the beneficiary. Term insurance is often the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
2. Whole Life Insurance: This type of life insurance policy remains in force for the insured individual’s entire lifetime and typically requires premiums to be paid every year into the policy.
3. Universal Life Insurance: This is a type of permanent life insurance in which the excess of premium payments above the current cost of insurance is credited to the cash value of the policy. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance charge, as well as any other policy charges and fees drawn from the cash value, even if no premium payment is made that month. The interest credited to the account is determined by the insurer but has a contractual minimum rate of 2%. When an earnings rate is pegged to a financial index such as a stock, bond, or other interest rate index, the policy is known as an “Equity Indexed Universal Life” contract.
4. Variable Universal Life Insurance: This type of life insurance builds a cash value that can be invested in a wide variety of separate accounts, similar to mutual funds. The choice of which separate accounts to use is entirely up to the contract owner. The ‘variable’ component in the name refers to this ability to invest in separate accounts whose values vary due to their investment in stock and/or bond markets. The ‘universal’ component refers to the flexibility the owner has in making premium payments, which can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance.

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