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What is it Life insurance and how does it work?

What is it  Life insurance and how does it work?

Most people will tell you that life insurance is a policy that you buy that pays money to your family if you die. If you ask them to describe essential policy features, the various types of policies available, and how they work, they will most likely try to divert the subject.

 However, if you're seeking for life insurance, those details are critical. This page will help you find the answers to the following questions:

Each life insurance policy is unique, as are the rules that govern insurance plans in each state. You should speak with a life insurance professional before purchasing a policy. It's also a good idea to contact with a legal or tax professional. The material provided here is intended to serve as general guidance only and should not be used in conjunction with any specific policy.

What exactly is a life insurance policy, and what are its main benefits?

A life insurance policy is a contract between an insurance company and an individual (or legal entity). Each life insurance policy is unique, as are the rules that govern insurance plans in each state. Most insurance policies, in general, specify the following:

  • The insurer: Only certain firms are permitted to provide life insurance, and these companies are governed by state insurance authorities.
  • The policyholder is the person or entity that owns (or "holds") the policy (such as a family trust or a business). The policy can either insure the holder or another person.
  • The insured is the person whose life is protected by insurance.
  • The death benefit is the amount paid by the insurer after the insured dies.
  • Beneficiaries: The individuals or entities who will receive the death benefit. It can entirely go to a single person (for example, a surviving spouse), or it can be distributed proportionally to several different people and businesses (e.g., three children could each get 30 percent and 10 percent could go to a charity).
  • The length of the policy: The time period for which the insurer agrees to pay a death benefit. This can be for a set period of time (e.g., 10 or 20 years) or it can be permanent - a policy that lasts as long as premiums are paid.
  • The premium: The monthly or annual payments required to keep the coverage active.
  • The monetary value: Permanent life insurance products, like whole life insurance policies, contain a cash value component that accumulates over time2 and can be cashed out or borrowed against. 3 A term policy does not have any monetary worth.

What are the many types of life insurance policies and how do they operate?

Term and permanent life insurance are the two most common types of life insurance. A term life insurance policy covers you for a set length of time, usually between 10 and 30 years. It is also referred to as "pure life insurance" because, unlike a permanent policy or whole life insurance, it does not have a cash value component — once the term expires, there is nothing left.

Permanent life insurance provides coverage for the rest of your life. 4 It is not a "pure life insurance" plan, as opposed to term, because it includes a cash value component that helps make coverage persist as long as the insured is alive and premiums are paid, as well as offering additional financial benefits. A portion of your premium dollars are invested, and your cash value grows tax-deferred5 over time – but the entire death benefit is payable immediately from the start of the policy. The cash worth, on the other hand, could take years to accumulate to a large amount. 

Permanent insurance is classified into two types: whole life and universal life. Whole life insurance is less complicated because the premium is fixed for life, the death benefit is guaranteed7, and the cash value grows at a fixed rate. Universal life insurance is less expensive, but the premiums, death benefit, and cash value growth rate can all change, making the policy more complicated. 

The figure below emphasizes the fundamental distinctions between the three types of policies.

Term, complete, and universal life are all compared.

Term life insurance Whole life insurance Universal life insurance
Coverage period Limited to a specific term (typically 10-30 years) Permanent lifetime protection Permanent lifetime protection
Builds cash value No yes yes
Cost for a given death benefit10 Less expensive than whole or universal More expensive than term More expensive than term
Premiums Can vary Typically fixed Can vary
Tax-free death benefit11 Yes, typically Yes, typically Yes, typically
Primary uses Death benefit income protection and replacement Death benefit income protection; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer Death benefit income protection; tax-advantaged wealth preservation and transfer

What advantages do people gain from life insurance at various phases of their lives?

Most adults should consider life insurance because it may be a strong tool for maintaining your financial confidence – and especially the financial confidence of those who rely on you. However, before purchasing a policy, you should consider what type of financial protection you require at this time in your life.

How do you get a policy that meets your needs now that you know what it is?

Another thing you should know about life insurance is that the longer you wait to acquire it, the more expensive it becomes. Don't put it off. It's a good place to start if you can get life insurance via your job. You can acquire a basic level of coverage at extremely low group prices - but don't think it'll be adequate.

Life insurance is one of the most important financial investments you can make – and it's worth taking the time to research all of your options in order to receive the coverage that's right for you. Speak with a financial representative you trust about your requirements. If not, Guardian can connect you with a financial representative who will listen to your needs, advise you on the best methods to meet those needs while staying within your budget, and then assist you in making a decision. You may also acquire a term life insurance quotation online by using our term life insurance calculator.

If you are an employee, taking advantage of your employer's benefits is a wise and cost-effective method to acquire the financial security you need for yourself and your family. Contact your human resources department to review your benefit information and establish how much life insurance you have access to. Life insurance may be provided as a benefit by your company, or you may choose to pay for supplementary life insurance through payroll deductions.

Find out more about how to purchase life insurance.

Frequently asked questions about life insurance

What does life insurance cost?

The cost of a policy – for a particular level of death benefit – can vary substantially based on the type of insurance (term or permanent) and all of the variables that can affect your life expectancy - age, weight, health, gender, lifestyle, occupation, and risk factors like smoking.

How can a life insurance policy be adapted to my specific requirements?

Almost all life insurance policies include extra features known as riders, which can give useful additional benefits that tailor the policy to your specific needs.
12 Guardian, for example, includes riders that can assist protect family assets by covering chronic care and end-of-life requirements while the insured is still alive.

Can I get a policy that allows me to expand my coverage later?

Yes, certain permanent life insurance policies have a benefit increase rider that allows you to enhance the death benefit at regular intervals (e.g., every three years) without having to undergo a new medical exam or provide evidence of insurability.


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