What is Life Insurance
Life insurance is a way for you to provide money to the people you love in the event of your death. It is an agreement between you and a life insurance company like Catholic Financial Life. You agree to pay premiums. We agree to provide you with insurance coverage upon your death. Think of it as a subscription service: as long as you pay premiums, you will be covered.
What are the Different Types of Life Insurance Policies?
If you have researched into life insurance, you have probably heard terms like “term life,” “whole life,” “universal life.”
At a high level, there are two basic types of life insurance to choose from: Term and Permanent. Term Life Insurance lasts for a fixed period. Permanent Life Insurance also known as “cash-value,” is life insurance with a savings component attached to them. Several different policy types fall under the umbrella of permanent life insurance: whole, variable and universal life.
What is Term Life Insurance?
Term Life is life insurance in its simplest and purest form. Term Life Insurance offers a low-cost way to provide life insurance protection to those you love. It has one purpose: to help you and your family reach your goals – whether that’s paying off your mortgage, covering college tuition, paying back college loans, supporting your family or income replacement in the event of your death.
Think of it as a financial safety net, stretched over a given amount of time, or “term” of your choosing – often between 10, 20 or 30 years. You make the same monthly payment, and if you die within the term, your beneficiaries will receive the predetermined payout.
At the end of your term coverage, your coverage will end, and so will your payments. Or you can convert it to a permanent policy or purchase another term policy*.
*Proof of medical underwriting, may go to renewable terms, increasing as you get older.
What is Whole Life Insurance?
Whole Life Insurance is the most popular type of Permanent or Cash-Value Life Insurance. This includes Catholic Financial Life's (CFL’s): Whole Life, Value Life, Single Premium Whole Life and 20 Pay Life policies. It differs from Term Life Insurance in two major ways:
- You do not pick a term for your policy – it lasts your whole life. As long as you keep up with the premiums, you're covered if something would happen to you. It offers life-long protection and builds cash value along the way.
- It includes a separate savings component that you can borrow against or cash out. Your cash value can increase the death benefit or provide access to extra living benefits.
These two differences lead to a higher premium – whole life is more expensive than Term. From an insurance perspective, that is because the premiums need to cover a higher chance that the policy will be paid out.
How Does Whole Life Insurance Work?
Whole Life Insurance has two components: the death benefit and cash value.
The death benefit (a predetermined sum of money) is the life insurance part of the policy. As long as you pay your premiums, your beneficiaries will receive the death benefit when you die.
The cash value is the savings part of the policy. When you pay your premiums, a percentage goes into savings, which earns interests and grows, tax-deferred, over time.
This can get complex, so keep in mind the following when shopping for whole life insurance:
When you die, your beneficiaries will not receive the cash value component, only the death benefit.
There are three ways to access your cash value in your whole life policy:
- Surrender your policy and collect your cash value – usually for a fee or penalty, and you lose your death benefit. Also, if you cash in your policy too soon, within the first 10 years, you often will not get back more than the premiums you paid in.
- You can withdraw money tax-free*.
- You can borrow against your policy. You can take a loan out against the cash value of your policy, but you will need to pay interest. If you die before you pay back the loan, the loan amount, plus the interest you still owe, are deducted from the death benefit.
Such withdrawals impact the performance of the policy and reduce the death benefit.