Life insurance, explained plainly

What it actually is

A purpose for individually owned life insurance. You own the policy and name the beneficiary, who decides how the money is used. It is not PMI, homeowners insurance or lender owned decreasing coverage.

Common policy types

Usually term matched to the years left on the loan. Sometimes permanent coverage.

What it may accomplish

Give your family the means to keep the home, pay it down or sell without pressure.

What it does not guarantee

That the mortgage is paid off. The beneficiary receives the money and chooses. Approval depends on underwriting.

Questions to ask

• Who receives the benefit, my family or a lender?
• Does the benefit stay level or shrink with the loan?
• What happens to the coverage if I refinance or move?

Where this fits

What it actually is

Generally a whole life policy with a modest death benefit and a simpler application, aimed at end-of-life costs.

Common policy types

Whole life, with a level, graded or modified benefit.

What it may accomplish

Leave a set amount for arrangements and remaining bills so the cost does not land on family.

What it does not guarantee

Acceptance, or a full benefit from the first day. Graded and modified policies limit what is paid in the early years.

Questions to ask

• Is the benefit level, graded or modified?
• Does the premium ever change?
• Who is the beneficiary and do they know the policy exists?

Where this fits

What it actually is

Another name for final expense insurance. The benefit is paid to your beneficiary, not to a funeral home, unless you set it up otherwise.

Common policy types

Whole life with a modest death benefit.

What it may accomplish

The same as final expense: money available soon after a death.

What it does not guarantee

That funeral costs are fully covered, or that prices will not rise. It is not a prepaid funeral contract and not a government benefit.

Questions to ask

• Is this life insurance or a prepaid arrangement with a funeral home?
• Can my beneficiary use the money for anything?
• What is paid if I die in the first two years?

Where this fits

What it actually is

A way of sizing a death benefit around the income a household would lose and the years it would be needed. A method, not a product.

Common policy types

Usually term. Sometimes layered policies of different lengths.

What it may accomplish

Keep housing, food, childcare and ordinary bills going for a period of years.

What it does not guarantee

That the estimate is right. It rests on assumptions about expenses and inflation. It also does not cover disability or job loss.

Questions to ask

• What does my household actually spend each month?
• For how many years would support be needed?
• How much of my coverage disappears if I change jobs?

Where this fits

What it actually is

A general purpose, not a policy type. It usually means a death benefit large enough to cover income, debts and a period of adjustment.

Common policy types

Term for needs that end. Permanent for needs that do not.

What it may accomplish

Give the people who rely on you time and choices.

What it does not guarantee

Any specific outcome. The amount, the term and the beneficiary designations decide what it does.

Questions to ask

• What exactly would go wrong financially, and for whom?
• For how long?
• Are my beneficiaries up to date?

Where this fits

What it actually is

Using a death benefit to pass a defined amount to specific people or a cause, usually alongside a will or trust.

Common policy types

Usually permanent coverage, since the need has no end date.

What it may accomplish

Leave a set amount to named beneficiaries, generally outside probate.

What it does not guarantee

A particular tax result. Death benefits are generally excluded from a beneficiary's federal gross income, subject to exceptions, and estate rules are separate.

Questions to ask

• Who should receive what?
• Do my beneficiary designations match my will?
• Have I spoken with an attorney?

Where this fits

This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.

What it actually is

A strategy of funding a whole life policy heavily and borrowing against its cash value instead of borrowing elsewhere.

Common policy types

Dividend-eligible whole life, often with riders that add paid-up insurance.

What it may accomplish

Provide a source of loans against cash value, where the contract permits, while a death benefit stays in place.

What it does not guarantee

Dividends, loan rates or results. Loans accrue interest, reduce the death benefit, and an unmanaged loan can lapse the policy with tax consequences.

Questions to ask

• What does the policy show at the contract's minimum values, with no dividends?
• What interest does a loan accrue, and what happens if I never repay it?
• How many years before cash value equals what I paid in?

Where this fits

This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.

What it actually is

A branded name for the same idea as infinite banking: a heavily funded whole life policy used with policy loans.

Common policy types

Dividend-eligible whole life.

What it may accomplish

The same as any cash value policy: a death benefit, plus cash value that may be borrowed against where the contract permits.

What it does not guarantee

Growth beyond the contract's stated values. Dividends are not guaranteed, and loans have a cost.

Questions to ask

• Which numbers in the illustration are contractual and which are not?
• What are the charges in the first ten years?
• What would I give up if I stopped paying early?

Where this fits

This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.

What it actually is

A phrase for taking loans against a permanent policy's cash value. The lender is the insurance company, and the cash value is the collateral.

Common policy types

Whole life, universal life or indexed universal life.

What it may accomplish

Access to funds without a credit application, where the contract permits.

What it does not guarantee

That borrowing costs nothing. Loan interest accrues, the death benefit is reduced by what is owed, and a lapse with a loan outstanding can create taxable income.

Questions to ask

• What is the loan interest rate, and can it change?
• How does a loan affect how the policy is credited?
• What happens to the policy if the loan grows larger than the cash value?

Where this fits

This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.

What it actually is

The same loan strategy applied across a family, often with policies on several family members.

Common policy types

Whole life, sometimes juvenile policies.

What it may accomplish

Death benefits on several people, with cash value that may be borrowed against where the contracts permit.

What it does not guarantee

A result for the family. It depends on every policy being funded for decades and every loan being managed.

Questions to ask

• Are the adults adequately covered first?
• Who owns each policy and who repays each loan?
• What is the plan if premiums cannot be kept up?

Where this fits

This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.

What it actually is

Short for life insurance retirement plan. It is not a retirement plan under federal law. It is a permanent cash value policy funded with the intent to take loans or withdrawals later in life.

Common policy types

Indexed universal life or whole life.

What it may accomplish

A death benefit, with cash value that may supplement other income through loans or withdrawals where the contract permits.

What it does not guarantee

Retirement income, or any particular tax result. Cash value generally grows tax deferred under current federal law, and withdrawals and loans can have tax consequences, particularly on lapse, surrender or modified endowment contract status.

Questions to ask

• Have I used workplace and individual retirement accounts first?
• What does the lower-rate illustration show?
• What happens to the plan, and the taxes, if the policy lapses in my seventies?

Where this fits

This is a planning or marketing description, not a type of policy. It refers to a permanent cash value life insurance policy used together with policy loans. Results depend on policy design, premiums, costs, dividends or crediting where applicable, loan terms and how long the policy stays in force.

What it actually is

Funding an indexed universal life policy above the minimum so more cash value is exposed to index-linked crediting.

Common policy types

Indexed universal life.

What it may accomplish

Cash value growth linked to an index, within caps, participation rates and spreads, alongside a death benefit.

What it does not guarantee

That cash value cannot fall. A 0 percent floor limits the interest credited. Charges continue and reduce cash value in a flat or negative period. Caps and rates can change.

Questions to ask

• What are the current cap and participation rate, and what are the contractual minimums?
• What are total charges in years one through ten?
• How much can I fund before the policy becomes a modified endowment contract?

Where this fits

What it actually is

A policy the business owns on someone whose loss would hurt revenue or operations. The business is the beneficiary.

Common policy types

Term or permanent.

What it may accomplish

Cash to cover lost revenue, recruiting and obligations during a transition.

What it does not guarantee

The survival of the business. Employer-owned policies also have notice, consent and reporting requirements.

Questions to ask

• Who would be hardest to replace, and what would it cost?
• Has the insured person given written consent?
• Has our CPA reviewed the tax treatment?

Where this fits

What it actually is

Life insurance used to supply the cash a buy-sell agreement calls for. The agreement is a legal contract your attorney drafts. The insurance funds it and does not replace it.

Common policy types

Term or permanent, owned by the partners or the business depending on the structure.

What it may accomplish

Let surviving owners buy a deceased owner's share and let the family be paid.

What it does not guarantee

That the amount matches the business's value. Coverage falls out of date as the company grows.

Questions to ask

• Is there a signed agreement, and when was it last updated?
• When was the business last valued?
• Who owns each policy, and why?

Where this fits

Advanced planning concept, coordinate with tax and legal professionals

What it actually is

An employer pays a bonus that the employee uses for premiums on a policy the employee owns. The name comes from Section 162 of the tax code.

Common policy types

Usually permanent coverage.

What it may accomplish

A benefit for a selected employee, with the employee owning the policy.

What it does not guarantee

Any tax outcome. The bonus is generally taxable compensation to the employee, and deductibility for the employer depends on the facts.

Questions to ask

• How is the bonus taxed to me?
• What happens to the policy if I leave?
• Has the company's CPA reviewed it?

Where this fits

Advanced planning concept, coordinate with tax and legal professionals

What it actually is

An arrangement in which two parties, often an employer and an employee, share the premiums, cash value and death benefit of a policy under a written agreement.

Common policy types

Permanent coverage.

What it may accomplish

A way to fund coverage for a key person with costs and benefits divided by agreement.

What it does not guarantee

Simplicity or a tax result. These arrangements are governed by detailed federal tax rules and need legal drafting.

Questions to ask

• Which tax regime applies to this arrangement?
• What does each party receive at death and on termination?
• Who drafted the agreement?

Where this fits

Advanced planning concept, coordinate with tax and legal professionals

What it actually is

Using a death benefit to give an estate cash for taxes, debts and costs, so property or a business does not have to be sold quickly.

Common policy types

Permanent coverage, sometimes a policy insuring two lives that pays at the second death.

What it may accomplish

Put cash in the right hands at the time it is needed.

What it does not guarantee

That proceeds stay outside the taxable estate. That depends on who owns the policy and how it is structured.

Questions to ask

• What would my estate owe, and when?
• Who should own the policy?
• Has an estate attorney reviewed the plan?

Where this fits

Advanced planning concept, coordinate with tax and legal professionals

What it actually is

An irrevocable life insurance trust. A trust, drafted by an attorney, that owns a policy so the proceeds are managed under the trust's terms.

Common policy types

Usually permanent coverage.

What it may accomplish

Control over how proceeds are used, and in some cases keeping proceeds out of the insured's taxable estate.

What it does not guarantee

A tax result. It cannot easily be changed once created, and the rules on transfers and timing are strict.

Questions to ask

• Do I need this, given the size of my estate?
• Who will be the trustee?
• What happens if my circumstances change?

Where this fits

What it actually is

A permanent policy on a child's life, owned by a parent or grandparent, that can be transferred to the child as an adult.

Common policy types

Whole life, sometimes with a rider to buy more coverage later.

What it may accomplish

Coverage that starts young, and where a rider applies, the option to add more later without new medical underwriting.

What it does not guarantee

A college fund. Cash value grows slowly after charges. Accounts built for education have their own rules and may suit that goal better.

Questions to ask

• Are the adults in the household covered first?
• What is the goal: coverage, or savings?
• Have we compared a 529 plan?

Where this fits