What is Life Insurance?

Life insurance: Talk about an unpleasant purchase. Gee, why not just cue a visual of the worst thing you can imagine, huh? 

These feelings, while understandable, must also require you to twist your thinking in a different direction. Imagine this: Your spouse has no trouble paying off the mortgage in the wake of your untimely death. Your child gets to go to college debt-free despite the fact that you died 10 years before he or she began college.

Life insurance provides financial calamity from resting on the shoulders of your loved ones, and truthfully, it’s one of the most selfless things you can do for your family. Let’s explore life insurance and how to get it. 

What is Life Insurance?

Life insurance is a contract between an insurer and a policyholder. It guarantees that your insurer will pay a sum of money to your named beneficiaries when you die. In return, you must pay premiums to the insurance company during your lifetime.

Types of Life Insurance

You can find two main types of life insurance: term life insurance (also known as temporary life insurance) and whole life insurance (also known as permanent life insurance). Let’s take a quick look at each type. 

Term Life Insurance

Term life insurance offers coverage for a specific period of time. Common time frames for term insurance include 10-, 15- and 20-year terms. You can even find insurance companies that offer longer terms, such as 30- or 35-year terms. If you die while the policy is in effect, your beneficiary (or beneficiaries) receive a death benefit. 

What happens when you outlive your policy? In other words, let’s say you take out a 15-year term insurance policy and live past the 15 years since you bought the policy. Unfortunately, your beneficiaries receive no benefit. You may want to ask your insurance company if you can extend your policy after the 15-year window ends or convert it to a long-term policy.

Whole Life Insurance

Whole life offers coverage for your whole life as long as you continue to pay your premium. Your premium will cost more for whole life insurance compared to term insurance. The major difference between term and whole life is your ability to accumulate cash value with a whole life policy. This cash value earns interest and you may be able to borrow against your whole life policy while you’re still living. You can use this money for whatever you want, such as a down payment on a house or college tuition. (You do have to pay back the loan, plus interest, however.)