What Is Life Insurance?

Life insurance is a financial resource for your loved ones in the event of your death. You enter into a contract with an insurance company, which promises to provide your beneficiary(ies) with a certain amount of tax-free money upon your death. In return, you make periodic payments, known as premiums. The amount of the premiums generally depends on factors such as your age, gender, occupation, medical history and whether you intend to build up cash value in your policy. Life insurance is available for people of all ages, including children and the elderly. Some policies may require a medical exam, or other medical test as part of the application process.
Certain types of life insurance may also provide benefits for you and your family while you're still living. For example, accidental death or dismemberment insurance may provide benefits in the event of a catastophic event that does not result in death. Some policies accumulate cash value on a tax-deferred basis that can be used for future needs such as supplementing your retirement income or helping provide for a child's education.


Universal Life Insurance

This is a flexible life insurance plan. These policies are interest-sensitive and permit the owner to adjust the death benefit and/or premium payments, within limits, to fit the owner's situation. Your net premium payments are applied to the accumulation fund, which earns a guaranteed interest rate. The monthly cost of the death benefit and policy administration is deducted from the accumulation fund. As with whole life insurance, the cash value is yours and you may withdraw it or borrow against it at any time. Read your policy carefully to understand how withdrawals may affect the death benefits. Since you decide how much premium to pay, within limits, some universal life policies even allow you to skip payments. If you skip a premium payment, the administrative and death benefit costs are deducted from your cash value. The policy stays in effect until your cash value can no longer cover these costs. Make sure you understand your annual statement so you know how much interest your policy is earning and how much cash value you have. Universal Life Insurance rates are subject to change, but the rate will never fall below the minimum rate guaranteed in the contract.


Term Life Insurance

This is the least expensive type of coverage, at least initially, and the simplest to understand. These policies do not build up a cash value. Coverage is in effect for a fixed term or period of time - usually one to 30 years - and usually can be renewed. The policy pays your beneficiary a fixed amount of money if you die during the term of the policy. The premiums are lowest when you are young and increase upon renewal as you age. Be sure to check your policy for age or other renewal restrictions.


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