Thinking about getting life insurance? Not sure how it works or how to choose? Well first of all, what is life insurance? It’s a contract where you make payments to a company who in turn pays out a lump sum (death benefit) to beneficiaries when you die. This type of insurance is generally chosen based on the needs and goals of the person looking for it. Unlike universal insurance which provides lifetime coverage, life insurance only covers a period of time. Death benefits as they are called are typically tax free. Here are a few of the most common types of life insurance.

Whole life insurance

This is a permanent policy, designed to provide coverage for the duration of your life. These policies tend to have high premiums because of the lifetime coverage. Policy premiums don’t change and it has a cash value that acts as a savings but over time can accumulate taxes. Whole life insurance is also used to accumulate tax-deferred savings. It can be used as an estate planning tool to help preserve whatever inheritance you intend on leaving for your family.

Term life insurance

These types are designed to provide financial protection for 10 to 20 year periods. At the end of that period, the coverage could continue with some policies but most times at a higher rate. Term life insurance is less expensive than whole/universal insurance. The money for this insurance is generally used to replace lost potential income over the years. This is like a safety net for your family because it can also help meet financial goals like paying off a mortgage or keeping a business running. It’s always good to keep in mind that even though term life insurance can be used to replace lost potential income, life insurance benefits are not made in regular installments but in one lump sum.

Universal life insurance

This is also a permanent life insurance and is tailored to cover you for life. Universal insurance is pretty flexible and give you the ability to increase or decrease your payments. It has a tax-deferred savings component as well, causing wealth to accumulate over a period of time. In most cases such policies are used as a flexible estate planning strategy, intended to help preserve family inheritances. Long term income replacement is another way it’s used, in this case the need goes past working years. Some of this type of policy focuses on providing both death benefit coverage and building cash value.