Life insurance can provide a financial payment to your family and loved ones upon your death. When you purchase a life insurance policy, you name a beneficiary 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. However, if you leave the death benefit to an estate or trust, it will be subject to taxes when the estate is settled.
There are two main types of life insurance: term and permanent.
Term life insurance provides coverage if you die within a specific period of time, 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. However, your premiums may increase when you renew the policy. For example, premiums would increase every five years on a five-year renewable policy. Most life insurance policies will only cover you up to a maximum age. For example, you may not be able to buy coverage once you reach age 75.
The death benefit is paid if your death occurs during the term or duration of the policy. For example, your policy will pay the death benefit to your beneficiary if you die before the policy expires. 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 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.
Permanent life insurance policies generally accumulate a cash value that is returned to you if you cancel your policy. Most policies will also allow you to use their cash value as collateral for a loan. Loans that you have not repaid reduce both the death benefit and any cash value.
The two most common types of permanent insurance are whole life and universal life policies: