Life Insurance
At its core, a life insurance policy is a promise: to provide financial protection to your loved ones if you’re not there. The way a policy carries out that promise is defined by a few key features:
The death benefit
The amount of money the insurance company will pay when the insured person dies. Typically, this benefit is income-tax free.
The beneficiaries
The person or people who get the death benefit. It can all go to a single person (e.g., a surviving spouse), or it can be divided by percentage among a few people (e.g., a spouse could get 50%, and two adult children could each get 25%). And by the way, a beneficiary doesn’t have to be a blood relative or even a person – if you choose, you can leave all or part of your death benefit to an entity, such as a charitable cause.
The policy length or term
The time period that the insurer agrees to pay a death benefit. In a term policy, it’s defined as a specific number of years, such as 10, 20, or 30. A permanent policy lasts for the life of the insured, for whole life as long as premiums are paid, and for universal life as long as the policy is funded properly to pay monthly expenses.
The premium
The monthly or yearly payments needed to keep the policy in effect.
The policy length or term
The time period that the insurer agrees to pay a death benefit. In a term policy, it’s defined as a specific number of years, such as 10, 20, or 30. A permanent policy lasts for the life of the insured, for whole life as long as premiums are paid, and for universal life as long as the policy is funded properly to pay monthly expenses.
The different types of life insurance policies and their key features
Term life insurance
A term life policy is exactly what the name implies: Coverage for a specific term or length of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because, unlike whole life insurance, there’s no cash value to the policy. It’s designed solely to give your beneficiaries a payout if you die during the term.
Most individual term policies have level premiums, so you pay the same amount every month. When the term expires, there’s no more coverage – you either have to go without or get a new policy, which will likely come at a higher cost: the older you are, the more expensive it is to get a policy. However, many providers – including Guardian – will allow you to convert a term policy to permanent life insurance for part or all of the coverage period. If you receive term life insurance through an employer, rates are typically issued “on attained age,” which means the rates will increase over time.
This calculator can help you determine the cost of term life insurance at the coverage level you want. How many years will your family need financial protection? For most people, it’s until the kids are grown up, the house is paid off, and there’s some money that can serve as a safety net for the surviving spouse.
Whole life insurance
A whole life policy is the simplest form of permanent life insurance, providing coverage that lasts your entire life. Like other permanent policies, it includes a cash value component: A portion of your premium dollars are placed into a cash value account, and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.3
Compared to other forms of permanent coverage, a whole life policy has three defining characteristics:
- The level premium remains the same for life
- The death benefit is guaranteed as long as the guaranteed premiums are paid4
- The policy includes guaranteed cash values that grow at a guaranteed rate
Cash value provides several significant benefits you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens, you can borrow money against it, use it to help pay your premiums, or even surrender it for cash to live on in retirement.5
When you get a whole life policy from a mutual company, such as Guardian, your cash value can also earn annual dividends6. You get a portion of the insurer’s profits, which can be used to increase the value of your policy and provide other benefits. While not guaranteed, Guardian has paid a dividend to its qualified whole life policyholders every year since 1868.
Whole Life vs. Term Life Insurance
The policy length
A whole life policy lasts your entire life, while a term policy only provides coverage for a limited number of years. Once the term expires, your beneficiaries are no longer entitled to a death benefit
The cash value
- A term policy has no value once it expires. A whole life policy is a life-long asset that can be accessed to help meet financial goals up to and after retirement.
The premium
- : For a given death benefit – e.g., $100,000 – premiums will be higher for whole life, along with the certainty that your beneficiaries will eventually be paid a death benefit
Final expense insurance
Final expense insurance is a form of life insurance intended only to cover end-of-life expenses such as funeral and burial costs. The coverage is permanent in the sense that if you keep paying premiums, the policy will remain in effect, but there is no cash value or investment component to these policies. Older people often buy final expense coverage without dependent children because it helps protect loved ones who might otherwise have to cover these costs out-of-pocket. While the premiums for these plans tend to be modest, the death benefit is also very limited – it’s not meant to provide years of financial support to your beneficiaries. Younger, healthier people who want to build cash value or a significant death benefit for their families will likely be able to find greater value in a whole life, universal life, or term life policy.
Simplified issue and guaranteed issue insurance
Most life insurance policies are underwritten: they require a medical exam as part of the application process so that the provider can assess your risk to insure. Simplified issue and guaranteed issue policies don’t require a medical exam. These plans are primarily designed for older applicants or those with serious health problems who may not qualify for policies that require a medical exam.
Some term policies and most final expense policies are either simplified issue or guaranteed issue. When applying for a simplified issue policy, you’ll be asked to fill out a health questionnaire in place of an exam. With a guaranteed issue policy, you won’t be asked to undergo an exam or complete a questionnaire – no medical information is needed to qualify for approval. These policies typically offer lower levels of coverage compared to other types, and premiums tend to be higher because the insurance company has to assume that there’s a high risk to providing coverage.
