For many people, investing in life insurance is a wise choice to protect assets and support family members when the policyholder dies. The proceeds from the policy provide coverage for your funeral expenses and give your family members an added bit of financial support during a difficult time, or you can choose to support your favorite charity upon your death.
Collectively, life insurance policies share some similarities in coverage characteristics. Your beneficiary does not pay federal income taxes on the death benefit received. In addition, for a policy with a cash value, the monetary value increases tax-deferred.
One distinct characteristic of term life insurance is just as the name suggests -- the policy remains in effect for a specified term. For example, the insurer cancels some term life insurance policies when the policyholders reach age 80. Premium payments either remain the same for the duration of the policy or increase periodically. Another coverage characteristic of term life insurance is that the policy holds no cash value, a reason term life insurance polices may be more affordable for some consumers than whole life policies.
A coverage characteristic of whole life policies, sometimes called permanent life insurance, is the accumulation of cash value besides providing a death benefit. The contract detailing a whole life insurance policy may allow the policyholder take out a loan against the cash value accumulated. Premiums for whole life policies are generally set and cost more than term life policies with comparable death benefits.
Universal life insurance gives the policyholder some leeway in premium costs, accumulates cash value and gives the beneficiary a death benefit. In addition, the death benefit may increase over time as the policy builds value. A variable universal life policy gives the insured the responsibility of choosing investment products with the accumulated cash value. These underlying investments supporting a variable life policy increase the risk of value loss due to the possibility of the investments failing.
Credit Life Insurance
A lender financing a mortgage or other loan may require you to carry credit life insurance. In this type of policy, the monetary value of the coverage decreases as you pay down the loan. When the loan is paid in full, the coverage is no longer in effect.
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.