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Life Insurance Basics


People buy life insurance for many reasons, including:

  • ensuring that their beneficiaries have enough money to maintain their standard of living,
  • paying burial expenses and outstanding debts, and
  • Meeting the requirement for business loans.

Beneficiaries are the people you designate to get the money from the life insurance policy after you die. The money is called a death benefit and is typically tax free to the beneficiary.

You may designate one or more beneficiaries. If you designate more than one, you must decide how to divide the money. You may also choose a secondary or contingent beneficiary to receive the money if the primary beneficiary dies before you. You may also designate an institution as your beneficiary.

Life insurance isn't an investment. An investment is a financial risk -- you might make money but you also might lose some or all of your money. Life insurance has some financial risk, but it pays a guaranteed death benefit if you pay your premiums.

Whole life, universal life, and variable Life insurance can build a cash value you can use while you’re alive. Although you can use this money for retirement income, agents and companies may not call life insurance an investment or retirement income source. If an agent or company tries to sell you a life insurance policy as a good investment, be wary. Also, don't confuse life insurance with annuities. People often buy annuities for retirement because they can provide steady income over a long period.

Insurance companies use a process called underwriting to decide whether to sell life insurance to someone and how much to charge them. The company will consider these factors to decide the premium to charge:

  • your age,
  • gender,
  • medical condition,
  • whether you use tobacco, and
  • your hobbies and occupation.

Younger people and people in good health, who don't use tobacco, and who don't have a hazardous job or hobby will have lower premiums because the company expects these policyholders to live longer. People who are older, have health problems, use tobacco, or have a hazardous job or hobby will pay more.

Companies may charge you a higher premium or decide not to sell you a policy because of your potential risk. If a company won't sell you a policy, keep shopping. Underwriting guidelines vary by company. You might find coverage with another company.

Who Needs Life insurance ?

People who have others who rely on them financially should consider life insurance. You might want enough insurance to pay your debts and to provide your beneficiaries with some income. Consider your circumstances and the quality of life you want your dependents to have when deciding whether to buy life insurance and how much you should buy.

Ask yourself these questions to help you decide if life insurance is right for you:

  • Do you need to replace your income to provide for your spouse, children, or other family members?
  • Do you have debt, such as a mortgage, credit cards, student loans, or other debt?
  • Do you want to help your children pay for college?
  • Will your family need money to pay for your funeral costs or the cost to settle your estate?
  • Do you have a large estate that could be subject to state or federal estate taxes?
  • Do you own a business that’s financially dependent on you or someone else?
  • Would you like to leave money to a charity?

If you answered yes to these questions, consider buying life insurance.

Buying Life Insurance for You or Someone Else

You may buy a life insurance policy for yourself or for anyone who gives you permission and agrees to the company's underwriting process. The person who buys the policy is the policyholder or owner and usually pays the policy premiums.

People usually buy life insurance for themselves to provide money for a spouse, dependent child, or other family member. Sometimes, you might want to buy a life insurance policy on someone else and name yourself as the beneficiary. For example, if you’re divorced and get child support, you might want to buy a life insurance policy on your former spouse to make up for losing child support if your ex-spouse dies.

Creditors may buy life insurance on people they loan money to. The policy would pay the balance of the loan if the person dies before it’s repaid. Businesses sometimes buy policies to cover the lives of employees or partners who are important to the company.

Provide for charitable organizations by buying Life insurance  coverage and making them the beneficiary to your life insurance policy.

Zero premium life insurance

TDI urges consumers to proceed with caution if they're asked to participate in what is commonly called a "zero premium life insurance policy." The policies are most often sold to people between the ages of 65 and 85. In these arrangements, the policy is owned by a stranger and the consumer receives a lump sum payment or the consumer's beneficiaries receive a portion of the death benefit. These nontraditional products in the stranger-owned life insurance market are also called "estate maximization plans" or "no cost to the insured" policies.

If you enter into one of these contracts, be sure you:

  • understand the contract and your obligations, 
  • know the company you are applying with,
  • are careful about disclosing confidential information,
  • consider the tax consequences,
  • understand that the policy might count as an asset when determining eligibility for public benefits, and
  • make sure the people involved in your transaction are licensed and registered by TDI. 

Types of Life Insurance

There are different types of life insurance: term life, permanent life, a combination of the two, and accidental death and dismemberment.

Term Life Insurance

Term life policies are typically cheaper and less complicated than permanent life policies. There are two types of term life policies, annual renewable term and level term:

  • Annual renewable term is a one-year term where the premium adjusts each year based on your age when you renew your policy.
  • Level term is sold with term periods of five, 10, 15, 20, 25, 30, or more years. The premium is the same during the period of the term. Some level-term policies guarantee that the premium won't change, but other policies only guarantee that the premium won't change for a few years even though the term may be for a longer period. It's important to read the policy to know how long your premium is guaranteed to be the same.

Term life insurance policies typically only provide a death benefit. If you die during the term, your beneficiaries get the death benefit. Term policies rarely include a cash value or a savings component and aren't designed to provide coverage for your entire life.

Term life insurance provides inexpensive coverage during a time when many people need it most, such as when they're raising a family, paying off debt, or going to college.

Term life can be a good choice for young families with children. You might need coverage only until your children are adults and are earning their own income.

Term Life Features

The two most common provisions of most term life policies are the convertibility provision and the renewability provision.

Convertibility means you can exchange the policy for permanent life insurance of equal value without taking a medical exam or going through any underwriting. This means you could transfer a policy without having to answer questions about your health or medical history.

Converting a policy will increase your premium because permanent coverage usually costs more than term life. Convertibility can be an important feature if:

  • your health worsens after you buy the term policy,
  • you can't qualify for another life insurance policy, or
  • you want to own a policy for your lifetime that builds cash value or savings.

Companies usually only allow policyholders to convert term life policies for a period of time, typically before they turn 65.

Renewability means you may extend the policy for additional terms, regardless of your health and without having to pass a medical exam. This can be another advantage of term life coverage. Most companies offer term life insurance only up to a certain age, usually 70 or 80.

Premiums generally go up at each renewal term. Annually renewable premiums can get high for people past middle age. If you're paying high annually renewable premiums, consider another type of term coverage, such as level term.



Term Life Payouts

Term life insurance is typically paid out in one of three ways:

  • Level term coverage pays a death benefit that remains the same over the term. For example, a 20-year level term policy with a $100,000 death benefit will always pay $100,000, whether the insured dies in the fifth or 15th year. Depending on the policy, your premium for level term coverage will either remain the same or increase at a scheduled rate.
  • Decreasing term coverage pays a death benefit that decreases over the term at a scheduled rate. For example, a 20-year decreasing term policy may begin with a $100,000 death benefit that decreases by $5,000 per year. If you die in the 11th year, the policy pays $50,000. Decreasing term coverage can be a good option for parents since a child's need for financial support typically decreases as the child gets older. A disadvantage of decreasing term coverage is that its convertibility value also decreases each year. Premiums typically remain about the same over the term. Mortgage life insurance is a version of this type of term life insurance.
  • Increasing term coverage pays a death benefit that increases over the term at a scheduled rate, which is often linked to inflation. For example, a 20-year increasing term policy may begin with a $100,000 death benefit that increases by 5 percent of the face value per year. If you die in the 12th year, the policy would pay about $155,000. Premiums typically increase each year relative to the benefit increase.

Permanent Life Insurance

Permanent life policies usually have higher premiums because they provide coverage for your entire life and have other features and benefits. The main feature of most permanent life insurance is a cash value or savings component that grows over time and may be withdrawn, invested, or borrowed against during your lifetime. You can also use it to pay for future premiums to keep the policy during your retirement years.

Your initial premiums for permanent insurance are typically higher than for term life. There are two main reasons for this. First, the policy likely has a cash or cash value savings feature, and second, you're buying coverage for a longer period of time based on your current age. Generally, the premiums on a whole life policy never change. Universal life or variable life insurance premiums may change over time because the cost of insurance usually gets higher as you get older. Be sure you understand how your premiums might change over time.

If you buy a permanent policy when you're young and continue the policy into middle age, your premium will likely be lower than a term life policy bought when you're older. This is true even if the death benefit is similar.

A portion of each premium is placed into an account – known as the cash value – that grows over time. The amount may grow at a fixed interest rate for whole life or universal life policies. It may be tied to indexed interest rates in an indexed universal life policy. In a variable universal life policy, the cash values may increase or decrease if the sub accounts you select increase or decrease based on their underlying performance. These sub accounts are invested in stocks, bonds, or both and are subject to their own expenses.

A policy might allow you to withdraw from the cash value, use it as collateral for a loan, or use it to make future premium payments. Sometimes, if you withdraw the cash value, the company will cancel the policy. If that happens, the coverage will end and it might affect your taxes.

When you die, beneficiaries get the policy's death benefit. Depending on the policy, your beneficiary may get the death benefit and the cash value.

It might take a few years for a policy to build a cash value. The policies might also apply a surrender fee if you withdraw the money early. You might also be liable for income taxes on the money you withdraw from the cash value that exceeds the premiums you paid.

Consider your needs before deciding which type of life insurance is best for you. Buying a permanent life insurance policy and surrendering it early might not be a good financial decision.

Types of Permanent Life Policies

The two most common variations of permanent insurance are whole-life insurance and universal life insurance, also known as flexible premium adjustable life insurance.

Whole-life insurance remains in effect for your entire life unless you cash the policy in or stop paying premiums. The policy is guaranteed renewable so you never have to renew the policy. Premiums are fixed at the age you buy a policy. Therefore, your premium will be lower the younger you buy.

Some whole-life policies are participating. This means the insurance company might pay an annual dividend to policyholders. You can usually get the dividend in cash, add it to your policy's cash value to buy additional death benefits, or use it to pay future premiums.

Dividends aren't guaranteed. Some policies don't pay dividends at the company's projected rate and others might be higher than the projection. Ask for the company's history of projected dividends versus dividends actually paid before buying a policy.

Universal life insurance allows you to choose the amount of coverage, the amount of your premium, and the cash value you build. This policy also provides flexibility to change your premium payments and to make withdrawals or take a loan against the cash value. Remember that any changes you make may affect your coverage. The interest rate your cash value earns might get higher or lower over time based on the interest rate markets. The underlying expenses and charges could also change, which could affect future premium amounts or the longevity of your life insurance coverage. The policy may remain in force until the maturity date, which is generally age 95 or 100 if you have $1 or more in cash value. At the maturity date, coverage ends and you get the cash value. Because of the flexible nature, review the policy annually. Ask for an inforce illustration to make sure the policy hasn't changed. If it has, adjust the policy premiums or death benefit amounts to allow it to continue to the maturity date.

Some universal life policies pay a guaranteed rate of return. Others are variable universal life policies whose value depends on the performance of the sub accounts that an insured selects, which are invested in stocks, bonds, or other investments. Agents who sell variable Life insurance  in Texas must have a federal securities license and a standard state insurance license. The rules and policy terms for flexible premium policies are complicated. Talk to a life insurance professional to understand a policy before you buy it.

A universal life policy will allow you to change the amount you pay for the premium, the death benefit, or the cash value. Any adjustment you make will affect one or both of the other areas. For example, increasing your payment will increase either your cash value, death benefit, or both.

Many universal life policies give you the option to lower your premium payments below the amount needed to pay the cost of the insurance. Any shortfall in the payment versus the cost of insurance will be deducted from the cash value. Be careful to review your policy if you make a lower premium payment because, if the cash value reaches zero, you must pay the full cost of insurance or the policy will lapse. The company must send you an annual report with your cash value amount and how long the policy might last based on the cash value, cost of insurance, and interest rate credited to the cash value. Review the report regularly to monitor the future duration of the policy.

Some universal life policies have a secondary guarantee, or a no-lapse premium benefit. The primary guarantee is the premium payment to cover the cost of insurance. If the primary guarantee isn't enough, a secondary guarantee keeps the policy from lapsing even if the cash value is zero. However, the no lapse premium is typically a fixed amount that must be paid to maintain this no-lapse benefit.

Comparing the Major Types of Life Insurance

Permanent Life

Term Life

Whole Life

Universal Life


Low initially but may increase with each renewal.

Higher initially than term life. Normally doesn't increase because it's based on your age at the time the policy is issued.

Flexible premium payments.

Protects you for…

A specified period.

Your entire life if you keep the policy.

A flexible time period, which may be your entire life.

Policy Benefits

Death benefits only.

Death benefits, possibly a guaranteed cash value and a loan value.

Death benefits (that may include a cash value), possibly a cash value, and a loan value.


Ability to buy more coverage for a lower premium.

Generally fixed premium amount. Cash value accumulation. You may have loan options for the cash value.

More flexibility with your payments. Cash value is credited with current interest rates.


Premium increases with age. No cash value.

May be expensive to cover a short-term need. Usually little to no cash value in the first few years.

May be expensive to cover a short-term need. The payment isn't guaranteed. Low interest rates can affect cash value, which may increase the premium payments.


May be renewable or convertible to a permanent life insurance policy.

May pay dividends. May provide a reduced paid-up policy. Partial cash surrenders permitted.

Partial withdrawals are allowed. Increase and decreases to coverage amounts may be allowed


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