Key terms to know when learning about life insurance.
Regardless of the type of life insurance you are considering, there are many terms you should have a basic understanding of.
Here is our list of many of these terms as well as some helpful links to check our work:
- Living Benefits: Living benefits are additional benefits included in a life insurance policy that allow a policyholder to access a portion or in some instances, the entire death benefit while they are still alive. An example of this could be due to becoming disabled or getting diagnosed with a chronic or critical condition.
- Life insurance companies: a life insurance company manufactures life insurance policies, just like an auto maker (FORD) manufactures a car or truck.
- Life insurance policy: some common terms for this include; term insurance, whole life insurance, indexed universal life insurance, variable life insurance, and universal life insurance. These are all contracts between the life insurance company and you (the owner of the life insurance policy) to pay a death benefit to the beneficiaries you choose should you die while the policy is active.
- Life insurance premiums: otherwise known as premium payments, term life premiums, or whole life premiums and are the amount of money you pay for the features of your life insurance policy.
- Cash value: also known as the cash value component, cash value account, savings component of a permanent life insurance policy, is money that can build up inside a permanent policy. You can access this cash value through policy loans, or policy withdrawals. Use of cash value, may impact the amount of death benefit available to your beneficiaries.
- Permanent life insurance: also referred to as a permanent insurance policy, or permanent coverage, is simply a life insurance policy designed to have a death benefit and/or a cash value last for your lifetime.
- Lifelong coverage: this typically means the permanent life policy is designed to last your entire life.
- Death Benefit: this is the amount of money your beneficiaries will receive in the event of the insured person’s death while the policy is still active.
- Insured person: this is the person on whom the insurance is purchased
- Coverage duration: term life policy 10 year term, 20 year term, 30 year term life insurance.
- Individual life insurance: this simply means insurance that you individually own vs coverage you get through your employer.
- Beneficiaries: these are the people or entities you choose to receive your death benefit.
- Conversion: this is a process, not a product, of taking some or all of your term insurance and changing it to whole life or permanent insurance. It is a feature offered by many term life companies and is not always a guaranteed option.
What is Term life insurance
A Term Life Insurance policy provides a monetary death benefit when the insured persons pass away within the defined period of time (or term).
Your policy can be designed to range from 1 year to 30 years and can even last until a specified age. There are multiple levels of flexibility to allow you to design a policy that fits your exact needs and ensures you aren’t overpaying.
Term insurance is usually much cheaper than whole life coverage, as term policies don’t feature cash value and are generally replaced before or near the end of their set period.
Term life is an excellent choice when you are protecting from a temporary financial risk or obligation such as mortgage protection, income replacement, children’s education, or even gap funding your retirement plan.
What is Whole Life Insurance?
A whole life insurance policy is a type of insurance policy designed to offer life insurance benefits for your “whole life”, unlike term insurance which is only for a specified period of time.
Whole life benefits at a glance.
Whole life goes beyond the basics of term life by offering the following.
- Guaranteed premiums, which means your payments never increase.
- Guaranteed cash value accumulation
- Benefit stability, which means your policy benefit never decreases.
- Coverage protection, which means your policy cannot be canceled as long as you continue to pay your premiums.
A whole life policy also provides living benefits, such as the ability to borrow money against its cash value or even receive non-guaranteed dividends (accumulated in the policy typically).
Whole life insurance is an ideal choice for long-term financial security; it offers customers the opportunity to protect their loved ones and build up a secure retirement fund all in one neat package.
Term Life Insurance vs. Whole Life Insurance: Cost Comparison
When it comes life insurance, one of the biggest factors that people consider is cost.
Term insurance and whole insurance both offer various perks, but which one is more affordable?
There has even been some interesting research done in the 2022 Life Insurance Barometer Study that identified that many people overestimate life insurance costs by 300% or more. We think some of this can be attributed to not understanding the difference between term life insurance and whole life insurance.
When you compare the two types of life insurance side by side…
- term insurance tends to often be more wallet-friendly, since it provides a level death benefit coverage for a specified term (the number of years at a flat rate). You will see this show up as 10 year term, 20 year term or 30 year term for example.
- Whole life insurance, on the other hand, requires ongoing policy premiums throughout your life whole life (see how we did that). A whole life policy also offers cash value which is a savings component that is part of your policy. We will cover cash value in more detail later, so for now, if you are looking to save money today while still being covered tomorrow, consider opting for a term life policy.
Here is a quick chart we made to show you some example pricing differences between these life insurance policies. For the term insurance rates, we are looking at a 35 yr old in great health who is a non-tobacco user in Colorado. We are using the same for the Whole Life insurance rates, however, we averaged the rates for 3 mutual companies and it was built using a base Whole Life policy paying to age 100 for the stated death benefits.
Are whole life insurance policies worth it?
As with most financial products, the answer will depend on your personal circumstances as well. Whole life insurance provided by an excellent insurance company is a good choice especially when you’re planning for coverage well into your 90s and beyond.
Due to this lifelong coverage and more, whole life insurance premiums are typically higher than other types of insurance premiums, but here is a reminder of some of the features that typically come along with those higher premiums:
- cash value component
- cash value accumulation on a tax-deferred basis
- guaranteed death benefit typically up to age 120
- fixed premium payments
- access to your policy’s cash (available cash value)
You may already have existing life insurance and if that existing coverage is permanent insurance, you may want to consider adding term insurance to your planning strategy. If you currently only have term insurance in your coverage strategy, it often makes sense to have some permanent insurance that’s designed to last your entire life.
How To Choose Between Term Life Insurance and Whole Life Insurance
The best way to choose the type of life insurance varies depending on the needs of your family’s budget, long-term goals, and many other factors. At quote-bot, we always tell people it should be based on understanding how their earnings power works (this makes your decision on life insurance much easier).
Read more about how to understand your earnings power here.
We believe that you should own the amount of life insurance that you and your family want to cover your goals. We also believe that many people need to be budget conscious.
Over the years, we’ve found that if your life insurance premiums (including all benefits and riders you decide to include) are between 1% – 3% (annually) of your earned income or less, this is a manageable expense and allows you to stay on track with your other long term goals.
Term insurance is often the choice because it is affordable coverage compared to whole-life insurance. As your income increases over the years, this is where the term conversion feature really helps. You can begin to convert portions of your term life insurance into whole life insurance to begin building the permanent coverage you really want vs trying to buy it all now on a limited budget. And, converting your term insurance to whole life requires NO MEDICAL EXAMS!
We have a done for your solution that is coming soon that allows you to determine how much life insurance you need and will take you less than 5 minutes to complete. Until then, you can click “Get a Quote” anywhere on this page and quote, customize, and buy life insurance in minutes!
You can see how affordable term insurance really is, and you can do it all without needing to speak to an agent.
Do I need both term life and whole life policies?
The short answer is No.
It’s often best to buy term life insurance policies to cover your full life insurance plan when you’re younger because insurance rates do rise as you age. If you can afford to add some whole life insurance we do recommend adding it to your plan as well.
However, It’s important to remember that if you can’t afford permanent life insurance today, you can convert portions of your life insurance in the future to help build the whole life coverage you want. This also allows you to have both term life insurance and whole life insurance at the same time.
What is Cash value?
A whole life insurance policy grows cash value, but what exactly is cash value?
Whole life insurance policies have cash accounts whose value grows as the year progresses at guaranteed and fixed interest rate over time. This rate is not published or seen in an illustration, but this cash value growth is designed to have the whole life insurance policy endow by a specific age (for most life insurance companies this age is currently around 120).
Another component of cash value in a whole life policy is a Dividend. A dividend is essentially a return of premium to a policyholder from the insurance company’s excess investment return, savings on mortality and expenses, and sales that exceed their expectation.
A dividend rate is declared every year and is not guaranteed.
Borrowing cash value from a whole life policy
One benefit of permanent life insurance, specifically whole life is that can take a portion of the cash value component and borrow money from it quickly and easily without a need to qualify for the loan (except having money in your cash value account).
If you’re taking cash out for withdrawal or a loan, the balance of your debt is removed from the death benefit after the person has died if you have not repaid it (you can repay a loan, you cannot repay a withdrawal typically).
**Pro Tip: Purchasing whole life for young children is an incredibly efficient way to build an asset over time as their cost to insure is very low.
Can you convert whole life insurance to term life?
If you own whole life insurance you may have the option to convert your whole life policy to what is called extended-term insurance.
This is normally used when you are looking to downsize your whole life plan and uses a non-forfeiture option. Non-forfeiture options allow you to pay up your policy using the cash value that has been building up in your policy.
It essentially allows you to stop premium payments by using your cash value to pay for a paid-up policy or extended-term policy with no more premiums paid by you.
You should consult your policy details to see what options are available to you, but this is an option you are entitled to.
What happens to term life insurance at the end of the term?
Term life insurance policies have set periods of level payment and level death benefit. This shows up to to you as 10 year term insurance for example.
If you own a 10 year term life policy, your premiums and death benefit will remain level for 10 years. When the 10 year period is up, most term insurance policies don’t stop, but your premium payment will change at that time if you decide to keep the policy.
After that set period is up, you will pay an Annual Renewable Term premium based on your age at that time (now 10 years older in this example). This can often continue until age 95 for many life insurance companies, though your premiums will typically become unaffordable.
This leaves many people with a few options:
- Replace your 10 year term insurance with new term coverage before it expires (assuming you are insurable).
- Convert your 10 year term insurance to permanent insurance before this set period is up.
- Pay your annually renewable term rate until it is unaffordable or until age 95
We don’t encourage replacing life insurance, but finding coverage before your term period has expired is very important so you know what your options are.
The one instance we do recommend replacing an existing life insurance policy is when it doesn’t include living benefits. We believe everyone who owns life insurance should maximize the leverage of their monthly premiums to allow access to the death benefit should something unexpected occur while living.
Thankfully our process allows us to find this new coverage in 10 minutes or less! You can quote, customize and buy life insurance in minutes.
How do I Buy Life Insurance Coverage?
Many people today are concerned about the process of buying life insurance.
The old way of buying life insurance included several appointments with an insurance agent followed by completing an application, then completing a medical exam.
Thankfully the new way of buying life insurance may not require a medical exam at all. :)
In fact, our instant decision process allows you to quote, customize and buy life insurance in minutes and for most, without a medical exam. We discuss our process more clearly [here], but below is a quick list of the process:
How Do I Buy Life Insurance?
Thankfully we have made buying life insurance fast and easy, the entire process takes less than 10 minutes for most. Here are 5 easy steps to buy life insurance through Quote Bot:
Step 1: Start a quote. This process takes less than a minute because we need very little information to instantly show you a quote that you can customize. You just need to know your name, date of birth, state, general health, and tobacco status. We always send you a link to this quote for you to refer back to.
Step 2: Get Pre-Qualified, FAST! On your quote, we provide a link to continue to the application. This brings your first through a short pre-qualification so you know if you’re expected to qualify. This process can be as fast as two minutes to complete.
Step 3: Complete application. Once you see the pre-qualification results you can complete the application. This process takes between 5-10 minutes depending on your health history and customizations chosen. You will receive another instant verification of your expected eligibility before you sign your application. You will also put your payment information in on this step, but you are not charged until the insurance company has approved your signed application.
Step 4: Sign & Instant Decision. After you received your approval you will be able to instantly electronically sign your application. Once you finish your signatures, we bring you back to the final decision page and the Insurance Company will let you know within 90 seconds of your approval status. The insurance company will send your policy for electronic delivery after you’ve been approved!
THAT’s IT! It really is that simple and for most, this can be completed from beginning to end in 10 minutes or less.