An Introduction to Life Insurance

Posted by Bill Bruce on Apr 25, 2018 1:48:19 PM
Buying life insurance is about as exciting as buying your first minivan and as depressing as watching the movie Marley and Me. Still, owning life insurance is a significant part of anyone's financial planning due to its ability to protect your family in a variety of ways. In this post, we will briefly go over some of the basic concepts of life insurance, the different forms of coverage available, and some of the striking statistics about the vast amount of people who struggle with purchasing a policy. Are you ready to get started? Well, let's jump in.

What is life insurance?

Life insurance is a written promise between you and an insurance company. This contract will lay out the conditions of the coverage and explain the duties of each party. Here’s an example: If you pay your premiums in full, we will pay x amount of dollars to your beneficiaries when you pass away.

Simple, right? There are other uses for life insurance as well, but to keep this brief we are only going to cover its primary function and some of the basic terminology that goes along with it.

Thoughtful young woman with drawn question marks circulating around her head

How does life insurance work?

Before tackling this question, you need to understand the parties who are involved in the purchasing of life insurance. Typically, there are four primary roles when it comes to buying protection:

  • The Insurer: The company providing the coverage.
  • The Insured: The person covered by the policy.
  • The Owner: The person who owns the rights to the policy (generally the insured and owner are one in the same). 
  • The Beneficiary: The person or group that receives the benefits of the coverage.

Now that we've covered the basics let's go through an example together.

If you were looking to buy a policy, you would speak with a representative of an Insurer, who would then analyze your needs and help determine your ideal coverage. Then, you would fill out an application, name a beneficiary, go through underwriting, and get a policy issued. This process may seem extensive, but the truth is that most companies have developed systems so that it can be completed in 30 minutes or less.

Depending on the policy (we will use permanent life insurance here), you would have some form of financial obligation to the insurer, which boils down to you paying premiums for your coverage. Up to this point, it's just like every other form of insurance out there in the sense that you pay for protection. However, the difference between this coverage and something like homeowner’s insurance stems from the fact that you will probably never see the contract pay benefits since they aren’t paid out until after the Insured passes away. This sum will typically be delivered income tax-free to whoever was named the beneficiary, which is one of life insurance's main advantages.

What types of coverage are there?

This question can almost spawn an infinite amount of answers which is why we are only going to focus on the two most common categories of insurance.

Term Insurance:

Term insurance is incredibly straightforward and easy to understand. As the name implies, the coverage only lasts for a specific "term," which can start as low as five years and extend up to 30. Because the insurance is temporary, the premiums tend to be more affordable than its permanent counterparts, making it perfect for families on a budget or those who need supplemental coverage.

Permanent Insurance:

Also known as whole life insurance, permanent insurance will protect your beneficiaries for the duration of your life. These policies tend to be more expensive than term policies due to the policy provisions, non-forfeiture options, and cash value. These features give the owner more flexibility and offer more security, but let's backtrack for a moment. We just went over some terms that probably sound foreign to most, so how about we go over what they mean and how they work.

Policy Provisions: This general term refers to the features and allowances within the policy. An example of a provision would be the ability to take loans against the policy's cash value.

Cash Value: A staple of permanent insurance, the cash value is a portion of the policy that grows as you pay premiums. In most cases, it can be borrowed from and also plays a significant role in the non-forfeiture options too.

Non-forfeiture Options: These options prevent the owner from completely losing coverage if they can no longer pay premiums. Two of the standard options available are extended term insurance and reduced paid-up insurance. The former uses the cash value to pay premiums after the coverage is converted into term insurance and the latter uses the cash value to buy a paid-up policy of a lesser amount.

Mature couple meeting architect for construction project

What are some of the reasons why more people don't buy?*

Perception: Did you know that the average person overestimates the cost of life insurance by roughly three times the actual amount?

Knowledge: Approximately 60% of people didn't buy life insurance because they didn't know what to buy or how much to get. Buying a policy is a big decision, so it's best to gather as much information as possible before moving forward.

Approach: Almost 35% of the households who didn't have life insurance said they hadn't purchased any because they had not been approached by a financial professional. Does this sound like you? Then find an agent in your area here.


Overall, figuring out where to start looking when it comes to life insurance is a tedious and lackluster process that will feel like more of an annoyance than anything else. But, buying life insurance is an essential part of anyone's financial strategy as it is the best way of safeguarding your family from the potential economic downfalls associated with death.

If you are struggling with the buying process, why not download our free eBook titled: 5 Tips for Buying Life Insurance? The guide will help walk you through the initial first steps of buying life insurance and will also give you a broad overview of the different products and who should use them.

Download the 5 Tips for Buying Life Insurance

*Source:, 2016.

This article is for informational purposes and does not depict any specific policy. ELCO Mutual and its representatives do not offer legal/tax advice. If you are looking for tax/legal advice, please contact a tax/legal adviser.