Many factors go into choosing the right life insurance policy, such as your age, financial status, and how long you anticipate needing coverage. Let’s review some of the basics of life insurance, so you can make the best decision for you and your family.

The basics

Life insurance policies generally fall into two categories: term and cash value. Term life insurance is purchased for a specific period and pays a benefit only if the insured passes away during that term. It is typically designed to provide lower-cost protection for defined financial needs. Cash value policies, in contrast, can be maintained for life and include savings or investment features that allow policyholders to access value during their lifetime. Whole life, universal life, variable life, and indexed universal life policies fall into this category.

Term life insurance

Term life insurance is often used to cover temporary financial obligations. It may be appropriate if you have a young family and want to protect income for your children until they reach adulthood. It is also suitable for homeowners who desire coverage until their mortgage is paid off. Some people buy a term policy when they are nearing retirement and want to secure income for their spouse until Social Security or other retirement benefits begin.

Policies are commonly issued for terms of 10 or 20 years. Some policies allow for renewal at the end of the term, although premiums are typically higher than under the original policy. If a policy is not renewable, new coverage generally requires reapplying and qualifying based on age and health at that time.

Cash value life insurance

Cash value policies combine lifetime insurance protection with an accumulating cash component. There are several types of cash value policies.

With whole life insurance, you generally pay a premium that remains level for life, and the death benefit is guaranteed as long as premiums are paid. These policies include guaranteed cash values that grow at a stated rate. As the policyholder, you may borrow against the cash value, make withdrawals (subject to policy terms), or surrender the policy for cash, although surrendering coverage eliminates the death benefit and may have tax consequences.

When issued by a mutual insurance company, whole life policies may also earn dividends, representing a share of the insurer's profits. Cash value growth is tax-deferred, allowing you to pass wealth to beneficiaries in a tax-efficient manner or to cover end-of-life expenses such as medical costs, outstanding debts, and funeral expenses.

Universal life insurance also provides lifetime coverage and cash value accumulation but with more flexibility. Premium payments can be adjusted within policy limits, making these policies appealing if your household experiences variable income. You can also choose to pay higher premiums for faster cash value accumulation.

In variable life insurance, the cash value is invested in stocks, bonds, and other investment options. These policies offer flexible premiums and greater growth potential, but they also introduce investment risk, as returns depend on market performance.

Indexed universal life insurance seeks to balance growth potential and risk management. Cash value is typically linked to the performance of a market index, such as the S&P 500, subject to caps on gains and protections against market losses. This approach trades some upside potential for downside protection.

Group life insurance

Group life insurance is typically offered through an employer or membership organization. It can be a cost-effective way to obtain basic coverage or supplement an individual policy. Some group policies are portable, allowing coverage to continue if employment ends.

Premiums and planning considerations

Life insurance death benefits depend primarily on the policy's contractual terms and the insurer's financial strength, which is influenced by factors such as investment performance and claims experience. Some cash value policies build little value in the early years but grow more substantially over time, while others accumulate value more gradually. Understanding how and when values build is critical.

Before purchasing a policy, consider how long you need coverage, how much coverage is appropriate, whether you want insurance to serve as a wealth-building tool and how much you can afford in premiums. It is also essential to understand how benefits are paid and under what conditions cash values may be accessed.

Regardless of policy type, coverage should be purchased from an experienced insurer with strong financial ratings. Independent financial strength ratings provide an objective measure of an insurer's ability to meet long-term obligations. Meeting with insurance and estate planning professionals can help you understand policy values and benefits, which will better help you to evaluate whether a policy is in alignment with your financial goals.

Have questions?

Contact our Estate Planning team to learn more about how life insurance fits into your overall estate plan.

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