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Life Insurance Overview

Christy Bieber
By: Christy Bieber

Our Insurance Expert

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The right type of insurance coverage can help protect a person's family and assets. Life insurance is a vital type of protection. Here's everything consumers need to know about life insurance.

Who is life insurance for?

Life insurance is an important purchase for anyone who:

  • Has someone depending on their income
  • Has someone depending on them to provide services
  • Will have someone depend on their income or services in the future

Someone who provides for a family needs life insurance. If they pass away and their income disappears, without life insurance, their loved ones could struggle to pay the bills. But someone who provides services needs coverage as well. A stay-at-home parent provides valuable services, which someone might need to be paid to do upon their death.

Even individuals who do not currently have people depending on them should consider whether they will need coverage in the future. It is easier and cheaper to buy coverage when young and healthy. Those who wait until they have dependents and need coverage may develop health issues in the interim that make coverage harder or more expensive to get.

What are the basic components of a life insurance policy?

Here are the key components of a life insurance policy.

  • Premiums: This is the amount a policyholder pays for coverage. It could be paid monthly or annually.
  • Death benefit: This is the amount paid to beneficiaries upon a policyholder's death.
  • Cash value portion: When policyholders purchase whole life insurance, part of the premiums are deposited into a separate account and are invested. The policy accrues a cash value, which policyholders can cash in or borrow against.

RELATED: See The Ascent's guide to life insurance beneficiaries.

Learn More: Check out The Ascent's guide to cash value life insurance.

What are the different types of life insurance?

Here are the most common types of life insurance.

  • Term life insurance: A policy is in effect for a set number of years, such as 10, 20, or 30 years. Premiums are affordable, and the death benefit is paid only if the policyholder dies during the coverage term. There's no investment component or cash value.
  • Whole life insurance: A policy is in effect indefinitely while premiums are paid, and a death benefit is always paid. The costs are higher than for term life insurance but the policy accrues a cash value due to the savings portion of the policy. Policyholders are paid a fixed rate of return. They can borrow against the value of the policy or cash it out.
  • Universal life insurance: This is a type of whole life insurance that offers more flexibility than whole life policies. It also accrues a cash value. Policyholders can adjust the amount of their death benefit. While there is a minimum guaranteed rate of return, the exact return on investment (ROI) is not guaranteed and depends on market conditions.
  • Variable life insurance: This is another type of whole life insurance. The policy remains in effect indefinitely, and a death benefit is always paid. The cash value, however, is variable and no rate of return is guaranteed.
  • Guaranteed issue: Some insurers offer life insurance policies with a low amount of death benefits that anyone can qualify for without a medical exam and regardless of health status. These policies are also called "final expense insurance" because they can be used to cover funeral expenses.

What does a life insurance policy typically cost?

The life insurance cost can vary depending on policy type, age, health status, and whether someone is a smoker. Average costs of a term-life policy could be around $30 per month if purchased as a healthy young person or could be over $1,000 per month for an older smoker.

Whole life insurance premiums could be between five and 15 times greater than term life policies for coverage with a comparable death benefit amount.

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