You can buy life insurance that protects you for a limited period of time or stays in effect until you die.

All life insurance is alike in several ways. You pay premiums to a life insurance company in exchange for its promise to pay a certain amount of money, called the death benefit, to the beneficiary whom you designate when you buy the insurance. The death benefit is also known as the face value. The contract between you and the insurer is known as a policy, and it spells out the terms of the coverage.

If you own the policy, you are the policyholder. The rights of ownership allow you to:

If you’re the person whose life is covered by the policy, you’re the insured. You can be both the policyholder and the insured, or you can own a policy on another person’s life, provided you have what’s known as insurable interest. In brief, that means you would suffer financial hardship if that person died. Similarly, someone with an insurable interest could own a policy on your life.

In most cases, the beneficiary owes no income tax on the death benefit that’s paid when the insured dies.

Types of life insurance

Your policy may last for a specific term, or period of time, and maybe renewable. Or you can buy a cash value policy, also known as permanent insurance, which means it covers you for as long as you’re alive, or at least until you turn 100. With either term or cash-value insurance, you must pay your premiums on time to keep the policy in force. If you fail to pay, the policy lapses and no death benefit will be paid if you die.

Insurance online

An insurance company’s website can be a valuable resource, especially if you want to learn more about the various types of life insurance the company offers.

There may be a calculator to help you estimate the coverage you need. And if you purchase a policy, you’ll probably be able to manage your account, make payments, or report a claim online.

Term insurance Cash value insurance
As long as you pay the premium, you’re covered As long as you pay the premium, you’re covered
If you die, your beneficiaries receive the death benefit If you die, your beneficiaries receive the death benefit.
If you stop paying
If you stop paying the premium, the policy ends and you get nothing back If you stop paying the premium, you get the cash surrender value

Term insurance

Term insurance is the simpler and, at least initially, less expensive coverage. In exchange for your premiums, your policy covers you for a specific period, which could be as long as 20 or 30 years. If the policy is renewable, you may extend for an additional term without having to demonstrate you’re in good health. However, many policies are not renewable after you reach a specific age, such as 70 or 75. At each renewal, the premium increases.

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If you die during the term, and your policy is in force, the insurer pays the face value. But if you are alive when the term ends, and you don’t renew, you are no longer insured.

Term policies may be convertible. In that case, you can turn your term policy into a permanent policy with the same death benefit, generally without having to demonstrate that you are in good health. The premiums for a convertible plan are usually higher than for a regular term.

Comparing alternatives

If you’re not certain whether term or permanent insurance is right for you, it may help to think about how you would answer these questions:

  • Is a cash value account an effective way to save for your goals or might investments be better choices?
  • What’s the comparative cost of purchasing the amount of coverage you need?
  • Do you anticipate that your insurance needs will change significantly in the foreseeable future?
  • Is there any reason to think you may be less insurable in the future than you are now?

Cash value insurance

Cash value insurance combines a death benefit with a cash value account funded with part of each premium you pay. Earnings on the account’s assets are tax-deferred.

If you die while the policy is in force, your beneficiary receives the death benefit, which includes the balance in the cash value account. If you end your policy before you die, the insurer will subtract any outstanding loans you’ve taken against your cash-value account, plus outstanding interest and any fees, and send you the remainder, called the cash surrender value. No death benefit will be paid.

If the policy has been in force for a number of years, it’s possible that the amount you receive will be larger than the premiums you paid. If that’s the case, you’ll owe income tax on the difference between your cost and what you received, calculated at the same rate you pay on ordinary income.

Types of Life Insurance

Types of policies

Despite the seemingly endless varieties, there are two basic types of cash value insurance:

  • The whole life, sometimes called straight life, is the most traditional. The premiums stay the same for the length of the policy. Once you’ve paid all the premiums, the policy remains in effect until you die or, in some cases, turn 100. You accumulate a cash reserve, but you have no say over how the money is invested.
  • Universal life offers some flexibility. You can vary the amount of the premium by applying a portion of the accumulated savings to cover the cost. You can also increase or decrease the amount of the death benefit while the policy is in force. But you pay for this flexibility with higher fees and administrative costs. Typically, there’s a guaranteed rate of return on the savings portion for the first year, and a minimum, or floor, for the life of the policy.

Life Insurance Types And Their Difference Explained by Inna Rosputnia

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