The two broad categories of life insurance are term and permanent life insurance. Term insurance covers you for a specific length of time and pays a death benefit to your beneficiary if you die while the policy is in effect. Its relatively low cost may allow you to buy more coverage for less money.

Two Main Types

The two broad categories of life insurance are term and permanent life insurance. Term insurance covers you for a specific length of time and pays a death benefit to your beneficiary if you die while the policy is in effect. Its relatively low cost may allow you to buy more coverage for less money.

Permanent insurance lasts for your entire life and includes an investment component. The policy generally pays dividends and builds a “cash value” for you that is tax favored. Premiums typically are more expensive than term insurance premiums.

Permanent Life Insurance

If you choose permanent life insurance, you’ll have to select from a variety of policy types. These include:

  • Whole life — premiums stay the same throughout the period that you hold the policy.
  • Universal life — pays a minimum guaranteed interest rate and may allow you to change the premium amount to increase the death benefit. 
  • Variable life — offers a choice of investment funds; cash value and death benefit are based on investment performance. 
  • Variable universal life — offers the flexibility of changing the death benefit and premium amount as well as your investment choices.

Terms to Learn

Some common life insurance terms are:

  • Cash value — the equity that builds up in the policy when part of the premiums are invested.
  • Policy loan — a loan against a policy’s cash value. 
  • Accelerated death benefit — a benefit paid before the policyholder’s death to cover costs associated with a catastrophic illness.

Source: DST

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