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A life insurance policy is a contract with an insurance company. In exchange for premiums (payments made by you), the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries in the event of the insured's death. Typically, life insurance is chosen based on the needs and goals of the owner. There are basically three different types of Life Insurance Coverage. Term life insurance provides protection for a specific period of time, while permanent insurance, such as whole and universal life, provides permanent lifetime coverage. A further benefit of Life Insurance is that death benefits from all types of life insurance are generally income tax-free.
Types of Insurance
  Term life Insurance  
Term life insurance is designed to provide financial protection for a specific period of time, such as 10, 20 or 30 years. Premiums are usually level and guaranteed for that time. After the guaranteed period, policies may offer continued coverage, usually at a substantially higher premium rate. Term life insurance is generally a less costly option than permanent life insurance. Term life insurance proceeds are most often used to replace lost potential income during working years. This can provide a general safety net for your beneficiaries and can also help ensure the family's financial goals will still be met—goals like paying off a mortgage, keeping a business running, and paying for college.
  Universal life insurance  
Universal life insurance is another type of permanent life insurance designed to provide lifetime coverage. Not as rigid as whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium or coverage amounts throughout your lifetime. Universal life also has a tax-deferred savings component, which may build wealth over time. Additionally, due to its lifetime coverage, universal life typically has higher premiums than term. Universal life insurance is often used as a flexible estate planning strategy to help preserve wealth to be transferred to beneficiaries. Another common use is long term income replacement, where the need extends beyond working years. Some universal life insurance product designs focus on providing both death benefit coverage and building cash value while others focus on providing guaranteed death benefit coverage.
  Whole life insurance  
Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. Because of the lifetime coverage period, whole life usually has higher premiums than term life. Policy premiums are typically fixed and has a cash value, which functions as a savings component and may grow tax-deferred over time. Whole life can also be used as an estate planning tool to help preserve the wealth you plan to transfer to your beneficiaries.
Next Step: Determining Your Coverage Need
  Choosing between term and permanent coverage
Identifying the appropriate type of insurance is the first consideration in choosing coverage. If your insurance need is for your lifetime, then whole* or universal life insurance may be an appropriate solution. If your insurance need is primarily for a specific period of time, such as your working years, then term life insurance may be an appropriate solution. It is important to choose a coverage period that will meet your life insurance needs to ensure that the people important to you are protected.
  Choosing coverage amount  
In addition to your coverage period, the coverage amount is another important consideration. The coverage amount is how much will be paid to your beneficiaries if you (the insured) pass away. Your coverage amount will depend on the need you are trying to meet, but these are some general factors to consider: your potential income, your assets, your liabilities, existing insurance,
Major events in your life can be good opportunities to make your initial life insurance purchase or review your current coverage. The following life events should be accompanied by reviewing your life insurance coverage needs: getting married, buying or improving a home, having children, changing jobs, starting a business, college education costs, planning your estate. It is also recommended that you review your life insurance coverage during the routine update of your overall financial plan.