The most basic feature of a life insurance policy is the death benefit: the lump-sum payment your beneficiaries would receive if you were to die. It's the core reason to own life insurance—but not the only one. Some types of life insurance offer riders or other features that can play an important role in your financial strategy, such as the ability to accumulate cash value that grows over time.
There are many types of life insurance, but the bottom line is always the same: they pay cash to your family after you die, allowing your loved ones to remain financially secure. Life insurance payments can be used to cover daily living expenses, mortgage payments, outstanding loans, college tuition, and other essential expenses. And, importantly, the death-benefit proceeds of a life insurance policy are almost never subject to federal income taxes.
Term InsuranceTerm life insurance provides protection for a specific period—the “term”—and is designed for temporary circumstances. It makes the most sense to opt for term life insurance if your need for coverage will disappear at some point, such as when your children graduate from college or when a debt is paid off. The most common term policies provide coverage for 20 years, but they can run the gamut from one-year policies to terms of 30 years or even longer. In some cases, a term policy may also be converted to a permanent policy. Typically, term insurance offers the greatest amount of coverage at the lowest initial premium and is a good choice for young families on a tight budget.
Permanent InsurancePermanent insurance offers lifelong protection, and you can accumulate cash value on a tax-deferred basis. This cash account can be used for a variety of purposes, from helping you out of a tight financial spot, to providing funds that allow you to take advantage of an opportunity, to supplementing your retirement income. The downside? Initial premiums are considerably higher than what you would pay for a term policy with the same face amount.
Permanent insurance falls into four main categories: whole life, variable life, universal life and variable universal life. Whole life is the simplest and most common option. Premiums remain the same for your entire life, and the death benefit and rate of return on your cash value are guaranteed. With variable life, you can seek potentially better returns by allocating your fixed premiums among investment subaccounts, typically comprised of stocks and bonds. Universal life offers the flexibility of varying the amount of your premium payments. It also offers the certainty of a guaranteed minimum death benefit, if your premiums are sufficient to sustain it. If you're incapable of maintaining those minimum premiums, your death benefit may be reduced. Variable universal life premium payments are also adjustable, subject to the minimum needed to keep the policy in force and can be allocated among investment subaccounts that offer varying degrees of risk and reward.