Life insurance provides a financial payment to your family and loved ones when you die. When you purchase a life insurance policy, you name a beneficiary—the person who will receive the death benefit specified in the policy upon your death. Your beneficiary will receive the death benefit tax-free. You may also choose to leave the money to your estate or to a trust.
There are two main types of life insurance: term and permanent.
Term life insurance
Term life insurance provides coverage if you die within a specific time-period (unless you do not pay your premium). Term life insurance premiums are generally less expensive than permanent life insurance premiums when you first buy the policy. Premiums are usually fixed for the length of the term, often at intervals of five or ten years. They may increase when you renew the policy. Most term life insurance policies will cover you only up to a maximum age.
The insurance company pays a death benefit if your death occurs during the term or duration of the policy. However, once the term ends, the coverage ends, and you or your beneficiaries will not receive any payment. Most term insurance policies do not accumulate a cash value.
Permanent life insurance
Permanent life insurance provides coverage throughout your lifetime (unless you fail to pay your premiums). Permanent life insurance premiums are generally more expensive than term life insurance premiums when you first buy the policy, but may be lower than term life insurance premiums in later years. These policies generally accumulate a cash value after a certain period that you can receive if you cancel your policy. Most policies will also allow you to use their cash value as collateral for a loan.
The two most common types of permanent insurance are whole life and universal life policies. Whole life insurance guarantees the amount of your premiums and the death benefit. Your premiums will not change as you get older, and your policy will often have a guaranteed minimum cash value. Universal life insurance combines life insurance with an investment account. The investment account has a cash value. This type of coverage may permit withdrawals, as well as loans.
You can increase or decrease your premiums within the limits specified in your insurance policy. You can also select how to invest your premiums. The death benefit and cash value of your investment account may increase or decrease depending on the types of investments you hold in your account and the returns on those investments. The premiums you are required to pay could increase if returns on your chosen investments fall.