What Is Life Insurance? Here’s What to Know

It’s important to pay your premiums on time to keep your policy active or in effect. If your policy lapses, you could lose your coverage, leaving your beneficiaries unable to make a claim to the death benefit should you pass.

Buying life insurance

Life insurance is needed most when others need you most. Major life events such as getting married or having children often prompt people to purchase or expand their life insurance coverage.

Figuring out the proper amount of coverage can be complex. If you’re underinsured, you may not receive adequate protection. On the other hand, if you’re overinsured, you may end up paying too much in premiums. It’s a good idea to reach out to an insurance specialist or financial advisor to find an appropriately tailored life insurance policy for your family. 

Generally, you’ll want to consider these three key questions:

• What are your goals for your family?
• What is the annual income your family needs?
• What immediate expenses and future obligations do you want to cover?

Eligibility considerations

Certain types of life insurance require a health or medical evaluation. This means your health, your age, and your overall insurability are taken into consideration when your insurer underwrites a policy. 

As part of their assessment, your insurer may require you to undergo a medical exam where they run bloodwork and ask about your exercise habits, medical history, and lifestyle. Poor health or advanced age may result in denied coverage entirely.

This is why some people choose to buy and lock in policies when they’re younger and healthier; both of which usually mean you’re less of a risk to insurers, so you’re more likely to receive lower premium rates.

Types of life insurance

Life insurance policies generally fall into two broad categories: term and permanent.

Term life insurance

Term life insurance is a common low-cost option for individuals looking for coverage over a specific period of time (for example, when you’re raising kids or paying off a mortgage).

You choose a policy for a set number of years (or a “term”) and make premium payments during that time. Term options can range anywhere between 10 to 30 years. If you were to pass away during your term with an active policy, the insurance company would pay out the full death benefit to your loved ones. If the term ends or you stop paying the premiums, your coverage ends.

Permanent life insurance

Permanent life insurance comes in many forms, including whole life, traditional universal, or variable universal policies. 

While there are different types of permanent life insurance policies, they have one thing in common: Their coverage doesn’t expire as long as you make the payments required to keep the policy active.

In other words, permanent life insurance is designed to cover you over your lifetime as long as premiums are paid. This could be a good option for an individual with specific long-term financial goals or estate planning considerations for their family.

Moreover, unlike term insurance, permanent life insurance policies can build cash value over time. But be aware that accessing a permanent policy’s cash value (e.g., via a loan) typically comes with strict rules, depending on the specific type of policy you hold.

Because permanent life insurance policies often come with more specific riders, features, and rules, it’s a good idea to talk to your financial advisor or life insurance specialist to understand your options. They can help you customize a policy that’s appropriately tailored to your coverage needs and financial goals.

Some term life policies may allow you to transition into a permanent life policy

For term policyholders who are interested in purchasing permanent life insurance in the future, you may have the option to convert. However, not all term life policies offer this conversion option. Talk to your insurance provider to get details.

While term policies may offer the ability to convert to permanent, they’re not always the most affordable. Premiums will likely increase when you make the switch, but these convertible policies can allow you to lock in your coverage before it expires. When the time comes to purchase permanent coverage, shop around and compare your options.

Good to know: In general, as you’re shopping for insurance policies, don’t forget to look into your company’s compensation package. Many employers offer some form of life insurance coverage as an additional benefit.