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. You can name either a revocable or irrevocable beneficiary. Regardless of the type of beneficiary you name, 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 life insurance
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
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
Permanent life insurance provides coverage throughout your lifetime, unless you fail to pay your premiums. At first, premiums are usually higher than for term life insurance policies, but may be lower than term premiums in later years.
Permanent life insurance policies generally accumulate a cash value that is either added to the face value of your policy and paid out upon your death, or returned to you if you cancel your policy. Most policies will also allow you to take a loan against the cash value of your policy. 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.
- Whole life insurance is a type of permanent life insurance that guarantees the amount of your premiums. Your premiums will not change as you get older, and your policy will often have a guaranteed minimum cash value. The death benefit, or amount paid out upon your death, is also guaranteed.
- Universal life insurance is a type of permanent life insurance that combines life insurance with an investment account. The investment account has a cash value. Withdrawals, as well as loans, may be permitted. You can increase or decrease your premiums within the limits specified in your insurance policy. You can also select how your premiums are invested. The death benefit and cash value of your investment account may increase or decrease depending on the types of investments you choose to 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.