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Life Insurance Basics

Life insurance definition is a contract between an insurer and a policyholder. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured policyholder dies, in exchange for the premiums paid by the policyholder during their lifetime. (investopedia)

Whether you have had insurance for years or just getting started with life insurance, there is a lot of stuff to learn.  Coach B. Life Insurance Agency wants to make sure you understand the life insuranace basics and make sure that you feel confident that you are making better informed decisions when buying life insurance.

A Guide to Life Insurance Basics

basic life insuranceWelcome to our comprehensive guide to life insurance basics. Understanding the fundamentals of life insurance is essential whether you’re starting a family, buying a new home, or planning for retirement. In this article, we will break down the key aspects of life insurance, demystify industry jargon, and help you make informed decisions to protect your loved ones and secure your future.

Life insurance is a critical financial tool providing a lump-sum payment to your beneficiaries upon passing. It ensures that your loved ones can maintain their standard of living and meet financial obligations even in your absence. However, navigating the world of life insurance can feel overwhelming with the various policy types, coverage amounts, and options available. That’s where this guide comes in! We’ll explain the different types of life insurance, such as term life, whole life, and universal life, as well as the factors to consider when choosing a policy.

Whether you’re looking to protect your family’s financial security or leave a lasting legacy, our guide to life insurance basics will equip you with the knowledge and confidence to make the right decisions for you and your loved ones. Let’s get started.

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How to Calculate Life Insurance Coverage

Determining the right amount of life insurance coverage is crucial to ensuring your loved ones are adequately protected. Life insurance 101 basics is standard when trying to calculate the coverage you need, consider your financial obligations, such as mortgage or rent payments, outstanding debts, and future expenses like college tuition or retirement savings.

Start by adding up your current debts, including your mortgage, car loans, and credit card balances. Consider any outstanding student loans or personal loans as well. Next, estimate your future expenses, such as your children’s education or your spouse’s retirement needs. It’s important to factor in inflation and the potential loss of your income.

Once you have a total estimate, subtract any existing savings or assets that can be used to cover these expenses. The remaining amount will give you an idea of the coverage you should aim for in your life insurance policy. Remember, it’s better to err on caution and have more coverage than less to protect your loved ones.

How Does Life Insurance Work

life insurance basics 101Life insurance works by providing a death benefit to your beneficiaries in the event of your passing. You pay regular premiums to the insurance company, and in exchange, they promise to pay out the agreed-upon amount to your beneficiaries when you die. This lump-sum payment can be used to cover funeral expenses, replace lost income, pay off debts, or provide financial stability for your loved ones.

Life insurance policies typically have a term or a duration for which they are in effect. During this term, if you pass away, your beneficiaries will receive the death benefit. If you outlive the term of your policy, there is usually no payout. However, some policies, such as whole life or universal life insurance, provide coverage for your entire life, as long as you continue paying the premiums.

It’s important to note that life insurance is not an investment vehicle. While some policies may have a cash value component, the primary purpose of life insurance is to provide financial protection for your loved ones. If you’re looking for investment opportunities, it’s best to explore other options like stocks, bonds, or real estate.

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4 Types of Life Insurance Policies

Life insurance policies come in various types, each with its features and benefits. Understanding these different types will help you choose the policy that aligns with your goals and financial situation. The four main types of life insurance policies are term life, whole life, universal life, and variable life. Let’s explore each one in more detail.

Term Life Insurance Explained

basic term life insuranceTerm life insurance covers a specific term or period, typically 10 to 30 years. It offers the most affordable premiums, making it a popular choice for individuals looking for temporary coverage. Term life insurance is ideal for those who want to protect their loved ones during their working years or until certain financial obligations, such as mortgage payments, are paid off.

One of the critical advantages of term life insurance is its simplicity. You choose the coverage amount and term length based on your needs. If you pass away during the term, your beneficiaries receive the death benefit. However, if you outlive the term, the policy expires, and you won’t receive any payout.

It’s important to note that once the term expires, it can be challenging to obtain a new policy, especially if you’ve experienced changes in your health or lifestyle. That’s why it’s essential to consider your long-term needs and explore other policy options if necessary.

Whole Life Insurance Explained

Whole life insurance is a permanent life insurance policy that provides coverage for your entire life as long as you continue paying the premiums. It offers a death benefit and a cash value component, which grows over time. Whole life insurance is typically more expensive than term life insurance but provides lifelong coverage and potential cash value accumulation.

One of the main advantages of whole life insurance is its cash value component. As you pay your premiums, a portion of the money goes into a cash value account, which grows on a tax-deferred basis. You can borrow against this cash value or even surrender the policy for a cash payout, although this may have tax implications.

Whole life insurance suits individuals who want lifelong coverage and the potential for cash value accumulation. It can be used as a tool for estate planning or leaving a financial legacy for your loved ones. However, it’s essential to carefully consider the cost and evaluate whether the benefits outweigh the premiums in your specific situation.

Universal Life Insurance Explained

Universal life insurance is another permanent life insurance offering greater flexibility than whole life insurance. It combines a death benefit with a cash value component and allows you to adjust your premium payments and death benefit amount over time. Universal life insurance offers more control and customization options, making it attractive to individuals with changing financial needs.

One of the critical features of universal life insurance is its flexibility. Depending on your financial situation, you can increase or decrease your premiums within certain limits. Additionally, you can adjust the death benefit amount, which can be helpful if your financial goals change over time.

Universal life insurance also has a cash value component, which earns interest based on a minimum guaranteed rate or a rate tied to market performance. Subject to certain conditions, this cash value can be used to cover premiums or withdrawn. However, it’s important to consider the impact on the death benefit if you withdraw too much or don’t maintain the policy adequately.

Variable Life Insurance Explained

Variable life insurance is a type of permanent life insurance that combines a death benefit with investment options. It allows you to allocate some of your premiums to various investment accounts, such as stocks, bonds, or mutual funds. The policy’s cash value fluctuates based on the performance of these investments.

One of the main advantages of variable life insurance is its potential for higher returns. By investing in the market, you can grow your policy’s cash value more significantly than with other types of life insurance. However, it’s important to note that with higher potential returns comes higher risk. The cash value can decrease if the investments perform poorly.

Variable life insurance suits individuals comfortable with investment risk and want to combine life insurance protection with potential market growth. It offers more control and flexibility in investment options but requires active management and monitoring. If you’re unfamiliar with investing or prefer a more conservative approach, other types of life insurance may be a better fit.

5 benefits of life insurance

5 benefits of life insurance

Life insurance provides several benefits that can help protect your loved ones and secure your financial future. Here are five key benefits to consider when purchasing life insurance:

  1. Financial Security for Your Loved Ones: The primary purpose of life insurance is to provide financial security for your loved ones in the event of your passing. The death benefit can help cover immediate expenses such as funeral costs, replace lost income, pay off debts, and maintain the standard of living for your family.
  2. Debt Repayment: Life insurance can be used to pay off outstanding debts, such as a mortgage, car loans, or credit card balances. This ensures that your loved ones are not burdened with financial obligations and can maintain their quality of life.
  3. Income Replacement: If you are the primary breadwinner in your family, your passing could leave a significant financial gap. Life insurance can provide income replacement, allowing your loved ones to meet their financial needs and achieve their long-term goals.
  4. Estate Planning: Life insurance can be an essential tool for estate planning. It can help cover estate taxes, provide liquidity for your assets, and ensure a smooth transfer of wealth to your beneficiaries. This is particularly important if you have significant assets or a business you want to pass on to the next generation.
  5. Peace of Mind: Knowing that your loved ones are protected financially can provide peace of mind. Life insurance gives you the confidence that your family will be cared for even in your absence, allowing you to focus on enjoying the present and planning for the future.

Choosing the Right Life Insurance Policy for You

basics of life insuranceChoosing the right life insurance policy can be overwhelming with the variety of options available. Here are some factors to consider when selecting a policy:

  1. Coverage Amount: Calculate the coverage amount you need based on your financial obligations and long-term goals. Consider your outstanding debts, future expenses, and potential loss of income. It’s better to have more coverage than less to ensure adequate protection.
  1. Policy Term: Determine how long you need coverage. If you have specific financial obligations like a mortgage or until your children are financially independent, term life insurance may be a suitable choice. If you want lifelong coverage and potential cash value accumulation, permanent life insurance options like whole life or universal life may be more appropriate.
  1. Premium Affordability: Evaluate your budget and determine how much you can comfortably afford to pay in premiums. Keep in mind that premiums for permanent life insurance policies are typically higher than term life insurance. Consider whether the benefits of permanent coverage outweigh the cost in your specific situation.
  1. Policy Riders: Some life insurance policies offer additional riders or add-ons that can enhance your coverage. Common riders include accelerated death benefit, which allows you to access a portion of the death benefit if you’re diagnosed with a terminal illness, or waiver of premium, which waives premiums if you become disabled.
  1. Financial Strength of the Insurance Company: Research and choose a reputable insurance company with a strong financial rating. This ensures that they will be able to fulfill their obligations and pay out the death benefit to your beneficiaries when the time comes.

When choosing a life insurance policy, it’s essential to review the terms and conditions, ask questions, and seek advice from a qualified insurance professional. They can help you understand the policy details, compare options, and make an informed decision based on your unique needs and circumstances.

Why Life Insurance is Important and How to Get Started

Life insurance is essential because it provides financial security and peace of mind for you and your loved ones. It ensures that your family can maintain their standard of living, meet financial obligations, and achieve their long-term goals even in your absence. Life insurance can be a valuable tool for protecting your loved ones, leaving a financial legacy, or planning for your estate.

Getting started with life insurance is relatively straightforward. Here are the steps to take:

  1. Assess Your Needs: Determine the coverage amount and type of life insurance that aligns with your goals and financial situation. Consider your outstanding debts, future expenses, and potential loss of income.
  2. Shop Around: Research and compare quotes from different insurance companies to find the best coverage at a competitive price. Consider the company’s financial strength, customer reviews, and policy features.
  3. Consult with an Insurance Professional: Seek advice from a qualified insurance professional who can help you understand the policy details, answer your questions, and guide you through the application process. They can provide personalized recommendations based on your needs and assist with any necessary paperwork.
  4. Complete the Application: Complete the life insurance application accurately and truthfully. Be prepared to provide information about your health, lifestyle, and financial situation. A medical exam may be required depending on the policy and coverage amount.
  5. Review and Sign the Policy: Carefully review the policy’s terms and conditions before signing. Ensure you understand the coverage, premiums, exclusions, and additional riders or add-ons. Feel free to ask for clarification if you have any questions or concerns.
  6. Pay Your Premiums: Once the policy is in effect, make regular premium payments to keep the coverage active. Consider setting up automatic payments to ensure you get all the payments.

Remember, life insurance is a long-term commitment. Periodically review your coverage to ensure it aligns with your needs and make any necessary adjustments as your circumstances change.

In conclusion, life insurance is a vital financial tool that provides protection and peace of mind for you and your loved ones. Understanding the basics of life insurance, including coverage calculation, policy types, and benefits, is essential when making informed decisions. By assessing your needs, exploring your options, and consulting with an insurance professional, you can choose the right life insurance policy to secure your future and protect those you care about most.

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Frequently Asked Questions

What are the basics of life insurance?

Life insurance provides a financial safety net to those who rely on you. It pays out funds to your beneficiary if something happens to you, helping them securely manage their future without depending on your income. You can use it to provide for your family during the loss of life, health-related expenses, estate planning, and more. It's essential to understand how life insurance works and what type of plan is best for your specific situation.

What are the 3 main types of life insurance?

The three main types of life insurance are term life insurance, whole life insurance, and universal life insurance. Term life insurance covers a set period, usually 1-30 years. Entire life insurance is a permanent policy accumulating cash value over time and offering lifelong coverage. Universal life insurance is similar to whole life but offers more flexible premium payments and investment options.

What are 3 things you need to consider when buying life insurance?

When buying life insurance, you should consider the following factors:
Your age and health.
Your financial situation and needs.
The type of policy that is right for you.
Make sure to weigh all these elements when making your decision.

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About Coach B.

After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.

In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.

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