Life insurance is primarily purchased as a means to provide financial security to loved ones in the event the insured passes away. While it cannot replace those we lose, life insurance can help by filling the resulting financial void left behind. But it can also be a part of a broader financial or estate plan. In this case, when you buy life insurance and what kind of policy you purchase can have a significant impact on your overall financial planning strategy.
Understanding Life Insurance Lingo
Before you purchase a policy, it is important to understand the key terms that will be used to describe what you are buying. We’ve put together a glossary of life insurance terms to help you get started.
Beneficiary – The person (or people) who receive a life insurance policy’s death benefit.
Cash value – A component of a permanent life insurance policy that works like an investment with a savings component.
Death benefit – An untaxed lump sum that the life insurance policy pays to the beneficiary upon the policyholder’s death.
Insured – The person who the life insurance policy is covering. If the insured dies, the beneficiary will receive the death benefit.
Policy – The legal document issued by the life insurance company to the policyholder, stating the terms of the life insurance contract.
Policyholder – The owner of the life insurance policy. Typically, the person who pays the premium but not necessarily the insured.
Premium – The payments you make to keep your life insurance policy active. You must pay your premium to keep your policy “in force.”
Term life insurance – A life insurance policy for a specific time period (typically five to 20 years) that stipulates the insurance company must deliver a death benefit if the insured person dies within that timeframe.
Whole life insurance – A life insurance policy that lasts as long as the premium is paid and has an investment component. The death benefit is delivered to the beneficiary as long as the policy is in good standing. The investment component accumulates a cash value that the policyholder may withdraw or borrow against.
For a more extensive list of life insurance terms and their definitions, check out this glossary.
Advantages of Purchasing Life Insurance Early
Life insurance is a no-brainer as you age and acquire more assets — you need to ensure your family is financially protected should anything happen to you. However, buying life insurance at a younger age can be a smart financial move, offering the policyholder and insured some additional advantages.
Because a younger person poses less of a risk for the insurance company, premiums to insure younger individuals are typically lower. If a 24-year-old purchases a 20-year term policy, the premium is expected to remain level well into their 40s (depending on the contract purchased). As their financial needs grow, they can purchase additional policies and still have their level premium to fall back on.
Securing a policy when you’re healthy also helps ensure you are able to purchase insurance now. Most policies require evidence of being in good health (answering health questions and/or having a medical examination). If your health changes down the road, or perhaps you become too old to qualify, it may be too late or more expensive to get insurance.
Whole life (also known as permanent) insurance guarantees a death benefit as long as you pay the premium, and that premium stays the same for your whole life. Part of the premium in the early years of the policy accumulates to pay the higher cost of insurance as you get older. Over time the policy accrues a guaranteed cash value that can be borrowed against or paid out as a cash surrender if the policy is canceled during the policyholder’s lifetime.
No matter when you buy life insurance or which kind you buy, the best insurance protection is the kind that’s in force when you need it — to help provide financial protection for your beneficiary if something ever happens to you.
Learn More About Life Insurance Options from USBA
If you’re ready to optimize life insurance as part of your financial strategy, contact a USBA Product Specialist at 877–297–9235 between 9:00 am and 4:00 pm Central time, Monday through Friday. Find out what your rates for a new policy could be or if recent life changes qualify you for new discounts or reduced rates.
Uniformed Services Benefit Association (USBA) is a not-for-profit Association that provides group life insurance, health insurance supplements, and other products and services to military personnel, Federal employees, National Guard and Reserve members, Veterans and their families.
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