How does life insurance works and what does it encompass?

Each life insurance policy is unique, as are the rules governing insurance plans in each state. You should get advice from a life insurance specialist before acquiring a policy. It's also a good idea to speak with a legal or tax professional. The following information is given for informational purposes only and should not be used in conjunction with any specific policy.

What is a life insurance policy, and what are its key features?

A life insurance policy is a contract between a person and an insurance company (or legal entity). Each life insurance policy is unique, as are the rules governing insurance plans in each state. Most insurance plans include the following provisions:

- The insurer: Only a few businesses are allowed to provide life insurance, and they are controlled by state insurance authorities.

- The policyholder: The person or entity that owns (or "holds") the insurance (such as a family trust or a corporation). The policy might cover the policyholder as well as another individual.

- The insured: The individual whose life is covered by the policy.

- The death benefit: The amount paid by the insurer after the insured dies.

- The cash value: Permanent life policies, like whole life insurance, have a cash value component that builds over time2 and can be cashed out or borrowed against.3 A term policy has no cash value.

- The beneficiaries: The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse) or it can be divided by percentage among many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).

- The term of the policy: The time for which the insurer agrees to pay a death benefit. This can be a short-term policy (e.g., 10 or 20 years) or a long-term policy (e.g., for the rest of the insured's life as long as payments are paid).

- The premium: The amount paid each month or year to keep the coverage active.

What are the different kinds of life insurance policies and how do they work?

There are two types of life insurance:

Term and permanent. A term life insurance policy covers you for a certain amount of time, usually between 10 and 30 years. It's also referred to as "pure life insurance" since, unlike permanent or whole life insurance, it has no cash value — after the term expires, there's nothing left.

Permanent life insurance covers you for the rest of your life. 4 It's not a "pure life insurance" plan, unlike term, because it has a cash value component that helps make coverage persist while the insured is alive and premiums are paid, as well as provide other financial benefits. A part of your premium dollars is invested, and your cash value increases tax-deferred5 over time – but the whole death benefit is payable instantly on the first day you own the insurance. The monetary worth, on the other hand, may take several years to reach a considerable level. 6

Whole and universal life are the two basic forms of permanent insurance. Whole life insurance is easier to understand since the premium is the same for the rest of your life, the death benefit is guaranteed7, and the cash value grows at a set rate. Universal life insurance is less expensive, but premiums, death benefits, and cash value growth rates can all differ, making the policy more complicated. 8

The table below depicts the fundamental distinctions between the three types of policies.

Term life, whole life, and universal life 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 protection9
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 benefits do people get from life insurance at different stages in life?

Most individuals should consider life insurance because it may be a strong instrument for maintaining your financial confidence – and especially the financial confidence of those who rely on you. However, before purchasing a policy, consider the following: what level of financial protection do you require at this time of your life?

Now that you know what it is, how do you get a policy that works for your needs?

Another thing to keep in mind with life insurance is that the longer you wait to acquire it, the more expensive it becomes. Don't put things off much longer. It's a good place to start if you can get life insurance via your job. You can acquire a basic level of coverage for a low group fee, but don't think that's enough.

Life insurance is one of the most important financial investments you can make, so it's essential looking into all of your alternatives to get the coverage that best suits your needs. If you have a trusted financial advisor, talk to them about your requirements. If not, Guardian can link you with a financial advisor who will listen to your needs, explain the best methods to satisfy those needs within your budget, and then assist you in making a decision. Our term life insurance calculator can also help you acquire a quotation online.

If you are an employee, taking advantage of your workplace benefits is a wise and cost-effective method to provide financial security for yourself and your family. Review your benefit information with your HR department to see how much life insurance you have available. Life insurance may be provided as a benefit by your company, or you may choose to pay for supplementary life insurance through payroll deductions.

Frequently asked questions about life insurance

What does life insurance cost?

The cost of a policy – for a particular amount of death benefit – varies substantially based on the kind of policy (term or permanent) and all of the factors that might impact your life expectancy, such as age, weight, health, gender, lifestyle, occupation, and risk factors like smoking.

How can a life insurance policy be tailored to my needs?

Almost all life insurance plans offer riders, which are optional features that can give important extra benefits and help you adapt the policy to your specific requirements. 12 Guardian, for example, offers riders that can help safeguard family assets by covering chronic care and end-of-life expenses while the insured is still alive.

Can I buy a policy that lets me increase my coverage later on?

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

Disclaimer

All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information

Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

Only as long as you pay your premium.

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

In years one and two of the policy there is typically no cash value.

Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

Cost depends on a variety of factors, including, but not limited to: age, weight, health, gender, lifestyle, occupation, and risk factors such as smoking.