Life insurance is a contract between an insurance company and an insured person that requires the insurer to pay a sum of money known as a death benefit to a designated beneficiary upon the death of the insured person. The three basic categories of this type of insurance are term life, whole life and universal life.
This form of coverage is the least expensive. It’s good for a certain term of years, and then it lapses by time. It’s not permanent. Terms are generally 10 to 20 years. During that time, premium amounts remain the same. When the term expires, a new term might become available,but with significantly higher premiums.
This is a form of permanent coverage over the lifetime of the insured person. Like term life premiums, whole life premiums are also fixed, but they’re more expensive than term life. Two other things distinguish whole life from term life. First, you pay premiums over your lifetime. Second, whole life has what’s known as a savings component. A cash value accumulates over the years. That accumulated cash value is tax-deferred. You can cash out on the cash value, but there’ll be a taxable event. You can also borrow against that cash value, and you might avoid that taxable event.
This is a form of permanent life coverage, but premiums are variable depending on what the insured person wants to do with interest earned on accumulated cash value. It also accumulates a cash value, and it’s called a flexible form of permanent life. The death benefit, premium amount and savings component can all be adjusted by the insured person as life situations change. The insured person can also use interest gained from their cash value to help in paying for the cost of premiums.
Each one of the three main categories of life insurance has its own variations, and some of them can get quite complex. Your agent can detail all of them for you.