Life insurance 101

What is life insurance? 

Life insurance provides financial protection for your loved ones after a death.

A life insurance policy ensures that if you die while your policy is active, your loved ones will receive a lump-sum payout, known as a death benefit. The death benefit can be used to cover things like funeral arrangements, medical bills, credit card debts, mortgage or rent payments, education costs, and more.

For example, a 20-year term life policy with a $1,250,000 death benefit could cost $198/month for a healthy male, age 49 who does not use nicotine products.

In another example, a 20-year term life policy with a $625,000 death benefit could cost $36/month for a healthy female, age 29 who does not use nicotine products.

Every life insurance policy has four things:

1. Insured - The person whose life is covered under the policy. Typically, this is the person who owns the policy and pays the premiums, however, it is possible for the policy owner and payor to be someone other than the insured.
2. Beneficiary - The person(s), entity, or institution(s) that receive the death benefit if the insured person dies. You can name one person (or more) as beneficiaries when you purchase a policy.
3. Premium - The money paid to keep a policy active. Payment ensures that the insurance company will provide your beneficiaries with the stated death benefit in the event of your passing. If you stop paying premiums, the policy lapses.
4. Death benefit - The money paid out if the insured person passes away. Death benefits are generally not subject to an income tax and beneficiaries usually receive the benefit in one lump-sum payment

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Term life insurance

Term policies last for a specific amount of time (usually a 10, 20, or 30 year term).

• The death benefit is only payable to beneficiaries if the insured person dies during the term. If the insured person dies after the term ends, no death benefit is paid.
• Term life insurance policies are typically for large amounts of money, such as 8-10X your annual salary.
• Term life insurance monthly premiums can cost 5-10X less than a permanent life insurance policy of equal value, making it an affordable option for many. But a policy may be automatically cancelled prematurely if you miss a monthly premium payment, in which case no death benefit is paid if the insured person dies after a policy is cancelled. So be careful not to miss a payment if you want the policy to be active for the entire term. For that reason, term life insurance is kind of like "renting" insurance. If you outlive your term, you will typically have the option to renew your policy, but the cost of term life insurance rises with age. After age 40, term life insurance typically costs 10% more every 6-months.

Example: Sarah is a married, 35-year-old mother of 2 young children. She’s the primary breadwinner for her home, and she wants to ensure that her children will still be able to attend college in the event of her untimely death. For Sarah, a term policy makes the most sense. By structuring the term length around the time her children expect to make it through school, she can protect her children's educational future.

Learn more about term life insurance with Departure Plan →

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Permanent life insurance

Permanent life insurance is sometimes called "whole" life insurance because you can keep it active your whole life. As long as premiums are paid, it will never expire like a term life policy does.

• The death benefit is typically payable to beneficiaries when the insured person dies, no matter how old they live to be.
• Permanent life insurance is desirable because it can accumulate cash value over time. This cash value typically grows like an investment with a guaranteed minimum rate of return.
• You own whatever cash value has accumulated in the policy. Permanent life insurance policies typically allow a living insured person to borrow against the cash value accumulated in the policy, like a loan or cash withdrawal, if needed, that doesn't need to be repaid if they choose not to.
• Permanent life insurance policies are typically for a smaller amount of money because it can cost 5-10X more than a term-life policy of equal value.
• Many people choose to have both a term life policy and a permanent life policy because they want an affordable way to have a large death benefit from their term policy to pay for big expenses like their mortgage, debts, and college for the kids should they die during the term, but since it is likely they will outlive their term policy they also buy a smaller permanent life policy to at least guarantee their funeral costs will be paid for. The average funeral is about $7,500 but can vary widely depending on what kind of funeral you want.

Example: Frank is 68 years old and retired. He wants to make sure he doesn’t saddle his loved ones with expenses when he passes away. He’s looking for coverage that doesn’t expire, so he can guarantee the payout of a death benefit that will take care of his final expenses. A whole life policy makes the most sense for Frank because he will be covered for the duration of his life.

Learn more about whole life insurance with Departure Plan →

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