Life insurance: What it is and how it works

Wilson Moy, CFP®, CPWA®, Senior Vice President and Senior Wealth Planner

Understanding what life insurance is can help protect your family’s financial future. With different types of life insurance policies available, selecting the right coverage depends on your specific needs, goals and overall financial strategy.

Key takeaways

Understand the role

Life insurance can help protect loved ones, support long-term goals and manage financial risk as part of a broader plan.

Know your options

Different types of life insurance offer varying levels of coverage, flexibility and cash value features.

Plan thoughtfully

Evaluating needs, tax considerations and estate planning goals can help ensure coverage aligns with your overall strategy.

Life insurance is sometimes overlooked by high-net-worth individuals (HNWI), who may feel financially secure without it. However, understanding the benefits of life insurance can reveal how it serves as a versatile financial tool for protection, potential tax advantages and wealth accumulation opportunities.

When incorporated into a comprehensive financial plan, life insurance can help protect your loved ones, safeguard wealth and support your long-term financial goals. Consulting with an insurance professional, including your Huntington Bank advisor, can help tailor coverage to your specific needs and objectives as part of your overall risk management and financial planning strategy.

What is life insurance?

Life insurance is a contract between an individual and an insurance company, in which the individual pays premiums in exchange for a lump-sum, income tax-free payment to beneficiaries upon the death of the insured person. The death benefit may help avoid probate when properly structured, providing financial security to loved ones, business partners or other beneficiaries.

The types of companies that sell life insurance vary and include banks. In fact, Huntington offers life, long-term care, disability, home, auto, umbrella insurance, business and commercial coverage through Huntington Insurance, Inc.

What are the different types of life insurance policies?

Understanding the different types of life insurance policies can help you select coverage that aligns with your long-term goals.

Term life insurance

This type of life insurance provides coverage for a specific period, such as 10, 20 or 30 years. It offers pure death benefit protection for an annual premium and is often used for temporary needs, such as replacing income, covering a mortgage or funding educational or business expenses. Once the term expires, the death benefit protection ends.

Permanent life insurance

This policy offers lifetime coverage and generally includes a savings element, which allows the policy to build cash value. Many permanent policies are designed to build cash value over time, which may be accessed through loans or withdrawals on a tax-preferred basis, subject to IRS guidelines. Additionally, death benefits are usually paid out to beneficiaries income-tax free.

Whole life insurance

This life insurance option offers fixed premiums and guaranteed cash value growth, with coverage lasting for the life of the insured as long as premiums are paid.

Universal life insurance

This type of coverage can be fixed or index-based, offering flexible premiums and adjustable death benefits. Cash value accumulation is generally tied to interest rates or index performance, depending on the policy design.

Variable universal life insurance

Like universal life, variable universal life insurance offers flexible premiums and death benefits, but policyholders take on more risk by investing the cash value portion in a variety of subaccounts, which may provide the opportunity for greater returns. Both the cash value and subsequent death benefit can vary based on the performance of the underlying investments.

Life insurance considerations

How much life insurance should you have? Determining the appropriate amount of life insurance involves a comprehensive analysis of financial obligations, lifestyle, estate planning goals and long-term objectives.

The following considerations can help assess potential life insurance needs:

  • What financial assets and liabilities exist today?
  • What sources of income would need to be replaced to support beneficiaries?
  • Does the policyholder own a business, and if so, what role do they play?
  • Are there dependents who rely on ongoing financial support?
  • Have estate taxes and probate costs been considered?
  • Are there charitable causes or organizations you wish to support?

Is life insurance taxable? In general, life insurance proceeds paid out to beneficiaries are generally not subject to federal income tax. However, it is essential to consult with a tax advisor and financial planner for guidance on structuring life insurance policies to maximize tax efficiency and minimize potential tax liabilities.

Is life insurance considered part of an estate? Life insurance proceeds may be part of an individual’s estate, but avoids probate given the beneficiary designation on each policy. Planning strategies can help ensure proceeds are distributed efficiently while minimizing potential estate tax exposure.

Getting the advice you may need

Because your finances and family dynamics are unique, your insurance needs are as well. Contact your Huntington Bank advisor or find a location near you to learn how Huntington Wealth Management can help you evaluate life insurance as part of a broader risk management and financial planning strategy.

Life Insurance

Protect what matters most

Life doesn’t follow a script. That’s why your coverage should be flexible enough to grow with you. No matter if you're raising kids, building a business, or thinking about retirement, we’ll help you shape a life insurance plan that supports your priorities, now and down the road. With options that adapt and guidance that’s personal, you can feel confident in every decision.

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