Life Insurance 101

Life insurance can be a baffling concept for some, which is why we've put together this guide to help you understand the basics. We'll explain the two basics types of policies so you can decide which life insurance policy is right for you.

Term Life Insurance Policy

A term life insurance policy is typically the cheapest and simplest kind of coverage. A term life insurance policy will protect you for a limited amount of time, usually ranging from 10-30 years. If you were to die during the time the policy is in effect, the issuer would pay death benefits to your beneficiaries. On the other hand, if you are still alive when the policy expires, your protection will stop unless you renew the policy. With a term life insurance policy, your policy will not have any cash value, nor will it accrue any value over its lifespan. Term life insurance is best for people who need temporary life insurance coverage and for people who need considerable protection on a limited budget. Here are some pros and cons to term life insurance:

• Low-cost protection
• Good supplemental coverage to other policies
• No income tax on death benefits
• Premiums might become unaffordable as you age
• You have no coverage once your policy expires unless you renew

Permanent Life Insurance Policy

A permanent life insurance policy offers a lifetime of coverage with the potential of building cash value. Universal life, whole life, and variable universal life are all types of permanent life insurance. A permanent life insurance policy covers you for your lifetime or up to a certain age, at which point your carrier will pay you your policy's cash value. An attractive feature of a permanent life insurance policy is that it has the potential to build cash value, which means you can borrow money against its value or withdraw from it to supplement your finances. In addition, most permanent life insurance policies accrue cash value on a tax-deferred basis, meaning you will not be taxed as long as the policy remains in effect. A permanent life insurance policy is ideal for people who are looking for long-term coverage, want their policy to accrue cash value, or would like to capitalize on the tax breaks the policy can offer. Here are some pros and cons to a permanent life insurance policy:

• Premiums do not increase with age
• Builds cash value
• Tax-favored treatment
• More expensive than term life insurance
• May face considerable taxes when policy lapses or is canceled

To make sure you get the best deal on your life insurance policy, see our How to Save Money on Life Insurance page.