An introduction to life insurance

KJ: Do I need life insurance? If so, how much is enough? What type of insurance should I get? These are three very frequent questions when it comes to life insurance, and the answer to each one is a resounding – you guessed it – “it depends.” There’s no one-size-fits-all when it comes to life insurance and insurance rules of thumb are seldom appropriate for your unique situation and goals, so let’s start first by taking a look at what life insurance options are available – we’ll look at how to determine what amount of coverage you may need in a later post:

Term insurance
The most basic form of life insurance coverage is a term policy. You purchase insurance for say 1, 5, 10, 20, or 30 years of duration, and if you pass away within the term, then your beneficiaries collect the proceeds. If you live past the term, then your beneficiaries get nothing. The insurance premium you pay during the term is (typically) the same each year, and you can often continue coverage past the term, but the cost is usually quite prohibitive at that point. Term insurance can be a relatively quick, cheap, and easy way to obtain large amounts of coverage. Especially if you are able to get group term insurance through work, you may not even have to go through any underwriting to get the coverage.

Permanent insurance
This type of insurance doesn’t have an expiration date like a term policy does, so it can provide for an insurance need when the timing of your goals is uncertain. In particular, it may be appropriate if you would always like to have some type of coverage since it provides coverage until you pass away – regardless of how soon or far off it may occur. Permanent policies come in many forms including:

  • universal
  • variable
  • whole insurance

  • There are a plethora of bells and whistles out there with anything in between or combinations of the above insurance types. Unlike term policies that typically have a set premium for the entire term, a permanent policy could have the same premium each year for the life of the policy, it could increase, or it could even decrease depending on the performance of the policy and options selected in the policy itself. Notably, premiums can often be quite a bit higher for permanent policies compared to a similar coverage amount with a term policy since the coverage can be in force for a much longer period of time and doesn’t automatically lapse after a set term. Also, these policies typically accumulate a “cash balance” that could be used to transfer to a new policy, distributed in a time of need, and/or used to buy more coverage each year (as examples).

    See also our follow-up post covering Making Sense of Life Insurance with more details outlining the ins and outs of selecting the right type and coverage amount of insurance for you and your loved ones.

      Do you carry life insurance?
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    4 thoughts on “An introduction to life insurance

    1. O boy, one of my favorite topics. The best anecdote about life insurance is that you are betting the insurance company you will die and they are betting that you will live-a long time. The first thing to remember about life insurance is that it is basically protection for: your family i.e. pay off bills if the bread winner dies or college for kids or leave an estate. If you are loaded with cash you can probably stop here. The types of life insurance listed in the blog are good examples of basic life insurance all you have to do is go to one of the insurance brokers on line (Accuqote etc) they can give you more prices for term insurance. If you want the full scope, call an insurance broker. I have more life insurance than I ever thought I would need but, that’s the point when I’m dead I don’t need it my family might so how do you approach this “touchy” issue. First determine why you are buying it, determine the amount of coverage, and now the type. I have three, yes three different types of life insurance, first a paid up life policy, face value $1,000, my mother bought when I was a child for a few bucks a month, it is paid up and currently valued at $5500, a whole life policy that seems expensive but as I age the premiums will not go up and if I live forever(ha) I can cash it in. I have two term policies that have different maturity dates, as I get older they will get more expensive(not affordable) so they will be canceled as the protection is also no longer needed( kids gone, mortgage paid off, etc). So bottom line is what can you afford and how lucky do you feel, to me life insurance of any type is an investment for peace of mind and as an important part of any financial plan.

      • Thank you for sharing, and great points! Buying life insurance really is a hedge against dying prematurely and being unable to have all those extra working years to fund your goals and support your family. With all the statistics and measures that factor into the cost of insurance, it’s stacked to the insurance company’s benefit, but it’s designed to protect you in the event something unexpected were to happen. It is a very important part of most people’s financial plan, and it can help provide that peace of mind that your children, surviving spouse, etc. will be taken care of.

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