Looking for a Life Insurance Definition? We’ve Got You!

Life insurance is a contract that you enter into with an insurer. This is why it’s so important for you to work with an independent agent. As with all legal documents, you need to know what you are getting into BEFORE you sign on the dotted line. 

These contracts are complicated and they outline EXACTLY what the expectations are of you AND the company. So you MUST understand what all of this means to you.

If you’re looking for a simple definition of life insurance, you need to understand that the coverage you receive is defined in a contract otherwise known as a policy.

The life insurance company you select lays out how much coverage they provide in exchange for your premium payments.

This coverage is called a death benefit, which is the money your beneficiary receives should you die during your term. 

For traditional life insurance, you’ll take part in a medical exam that determines what these premium payments are.

Premiums vary radically depending on your age and health. This is yet another reason to speak to Policy Architects TODAY.

Another concept you need to understand when if comes to the definition of life insurance is the word beneficiary:

So what is a beneficiary (ies)? It’s the person, people or charitable organization you select to inherit the money that’s paid out should you die during your term.

I’ve written a great article about this and some of the issues that come up here. 

This payout typically is provided in a lump sum, but this is not always the case. You can opt to have the coverage paid out over time. 

Most insurance companies have a compassionate terminal illness benefit in the event you are diagnosed by a doctor as having less than 2 years to live.

In this situation, the insurance company pays out an advance on the death benefit so you and your beneficiaries have some money before you pass away. 

Another wonderful perk for life insurance? The death benefits are provided to your beneficiary TAX FREE. 

For me, this type of coverage is the bee’s knees. It works for most people, most of the time.

Term life insurance is affordable and flexible. It offers temporary protection for the number of years or “term” you select.

For the most part, my clients pick 10, 20 and 30 year terms, but you may customize this period to meet your particular needs.

The most common reason people buy term life insurance is to cover the loss of an income. 

At the end of your term, coverage is terminated but typically you can convert your coverage to a permanent policy before that point within certain limits.

No simple definition of life insurance is complete without talking about permanent coverage.

Term doesn’t cover you ’til the day you die and this poses a problem for some people. That’s where permanent life insurance comes into the equation.

If you purchase whole life or a universal policy you have protection until the day you pass away as long as your premiums are paid in a timely manner.

This also means your premiums are substantially more expensive than term. This is because the life insurance company WILL have to pay out death benefits.

Cash value is also typically part and parcel of a permanent life insurance policy. This is when a portion of your premiums are set aside and accumulate.

You as the policyholder can borrow against these funds or withdraw them to use as you like. The cash value can also simply be left for your beneficiary. The thing is, cash value takes quite some time to build up.

Permanent life insurance is VERY COMPLICATED product and has many variations. Buyer beware, it’s not for someone who wants to set it and forget it.

This is what most people think of when I mention permanent life insurance.

Whole life, also known as cash value life insurance, protects you until the day you die, so there is a guaranteed death benefit as long as you pay your premiums on time.

These policies have a cash value accumulation feature that appeals to a lot of clients. This component really depends on the type of whole life policy you purchase. 

Functionally your premiums are divided between paying for the cost of your insurance and deposits into a policy investment account.

So over the years, any money you pay above and beyond the insurance costs accumulates in your cash value account.

The rub is, in the early years of your policy not a whole heck of a lot is building up in your cash value account. Not to mention the fact that you’re paying for commissions and administrative costs. But that’s not all…

…you also run the risk of paying a lot of money for nothing if you default on your payments. Way too many people get into these policies, find them too costly and give them up. That’s no fun especially when your premiums cost a bomb.

IMHO unless you’re someone with a lot of expendable income I wouldn’t suggest a whole life policy. That being said, a lot of agents do push them on clients, because these policies are attached to some pretty sweet commissions.

NOTE: I do have one addendum. Final expense life insurance is typically whole life and I do recommend it. It’s affordable and helps many families protect their loved ones from extortionate funeral costs.

Universal life insurance is another form of permanent protection that offers coverage until the day you die. It’s appealing to those who want to leave their family something when they pass away no matter what.

…BUT unlike whole life insurance, universal life is flexible and slightly more affordable.

These policies also have a cash value accumulation feature similar to whole life but more flexible and as such, more complicated.

This type of insurance allows you to adjust your death benefit over time as your needs and situation change. You’re also the one who decides how any cash accumulated in your policy is invested.

If you’re married or live with a partner, this might be something to consider.

The life insurance company enters into a contract with you and another policyholder – typically a husband and a wife. The death benefit pays out only when the second policyholder passes away.

This sort of policy is perfect for people who want to leave something for their children or grandchildren. The best part?

These policies are cheaper than insuring both lives separately. 

Similar to an RRSP or 401K, you choose the mix of assets you want your money to go into whether it be bond, equity or money market funds.

As a result, these policies aren’t guaranteed and you assume some risk…

BUT along with this risk is a higher potential for compounded growth.

You may have also heard it called Variable Universal Life Insurance, especially in the US. Either way, you’re exposed to the ups and downs of the market and as such, you have to keep your eyes on this product.

However, It does have a place in the life insurance world and can be very useful in certain situations. Read more about whether Universal Life is right for you in my article here.

Yes, you heard me right, there’s no Simple Definition of Life Insurance! Sure I can give you the basics, but there’s no way for me to give you a sound bite answer.

That’s why you should always speak to an independent life insurance agent, even if you’ve done all of your legwork.

We’ll do a financial analysis to determine what sort of life insurance works for you. Let’s put it this way someone who is making $50K annually looking to replace their income for 30 years is looking for a very different product that someone with a vast estate that’s trying to protect their assets from the taxman.

No to mention all the people who fall in between. 

There are so many options, companies, coverage amounts and terms to think about. All of this and we haven’t even talked about Guaranteed Issue!

This really is a process!