What Is Life Insurance? A Quick and Simple Guide

Get answers to common questions about life insurance and learn key terms

With a variety of types and plans, life insurance may seem confusing. Whole life insurance, term insurance, permanent life insurance, burial insurance — knowing the difference among these options can help you make informed purchasing and planning decisions. One way to get started is to break down commonly asked questions and define important terms. Then you can understand what life insurance is and choose which option is best for you and your family.

Life insurance FAQ

What is life insurance?

Life insurance is a legally binding contract that guarantees a benefit upon your death to named beneficiaries in exchange for premiums you pay. Types of life insurance include Term, Whole Life insurance, and Preneed Funeral insurance.

  • Term life insurance is purchased for a specific time period and protects your loved ones from income loss after your passing.
  • Whole Life insurance is a type of permanent life insurance that covers you while you’re alive for as long as you pay your premiums. A whole life insurance policy won’t expire after a certain term.
  • Preneed Funeral insurance specifically helps cover your funeral expenses. You preplan arrangements directly with a funeral home to lessen the burden on loved ones to pay for and coordinate a memorial service during an already difficult time.

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Which is better: Term or Whole Life insurance?

As you age, your needs for life insurance change. If you’re older, a Whole Life policy may be right for you. Whole life insurance is easier to obtain than Term life insurance because you aren’t required to take a health exam. The premiums for Whole Life insurance are often higher than Term policies, but it holds cash value that you have access to while you’re living.
 
Term life insurance offers lower premiums and a greater death benefit, but it holds no cash value, and your policy expires if you haven’t passed away before a given time. You may be able to renew your Term insurance policy, but premiums typically increase to reflect your current age. The better option between Term or Whole Life insurance depends on what stage of life you’re in.

Is life insurance taxable?

Life insurance premiums are considered personal expenses, which are not tax deductible. This means the money you pay into your life insurance policy may be taxable income subject to standard tax rates.
 
According to the Internal Revenue Service, if someone else names you a beneficiary, the proceeds you receive from his or her life insurance are not taxable income.

Is burial insurance the same as life insurance?

Burial insurance is just one type of permanent life insurance, and it’s intended to cover funeral or cremation costs. Burial insurance can be purchased as a Term or Whole Life policy, with benefits paid to your beneficiary. Since your beneficiary can use the benefit funds in any way, you could name a funeral home as your beneficiary to ensure the funds are used for death-related expenses.
 
Life insurance is a broader term that encompasses the total policy you pay into in exchange for a death benefit, not just funeral expense coverage.

Is a POD account a type of life insurance?

A Payable on Death (POD) account is a bank account, not a life insurance policy, that you pay into. After your death, the account becomes payable to a family member and is typically used to help cover funeral expenses.

Key life insurance terms

What is permanent life insurance?

Permanent life insurance is often called Whole Life insurance and refers to coverage that’s active for the duration of your life, with a benefit to be paid to your beneficiary after your passing. Different types of permanent life insurance include traditional and universal.
 
Final Expense insurance is another type of permanent or Whole Life coverage that allows you to set aside money for any of your final expenses, from medical bills to your funeral, and your beneficiary decides how to allocate it.

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What’s the difference between guaranteed assurance and guaranteed funeral plans?

Guaranteed assurance is the life insurance plan you qualify for without having to undergo a health assessment.
 
A guaranteed funeral plan refers to the cost of funeral services determined in a contract for permanent life insurance, which cannot increase due to inflation.

What’s a rider?

A rider is an addendum to an insurance policy that either extends or limits its benefits.

What’s the difference between a death benefit and an accelerated death benefit?

A death benefit is awarded to a beneficiary after you, the policyholder, pass away.
 
An accelerated benefit can be paid out while you’re still living, but this will decrease the benefit paid to your beneficiary after your death.

What is evidence of insurability?

Evidence of insurability is the medical and personal information an insurance company needs from you to provide you with coverage.

Learn more life insurance terms in the Glossary

 This article may contain links to third party websites, but Great Western Insurance Company is neither responsible nor liable for their content, accuracy, or security. Review our Terms and Conditions to learn more.
 
Photo credit: iStock

 
 

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