Life insurance pays out when the insured person dies.  The idea is to protect loved ones from a sudden loss of financial support. You could also use it to support your local charity. There are three basic types of life insurance that differ in their details.

Term life insurance is known as “pure” life insurance, because it pays out the death benefit if the insured person dies within the defined term, anywhere from one to thirty years. If the named person does not die, no portion of the premiums will be returned to the policyholder.  It simply insures against loss of life and has a relatively low premium reflect this.  Most term life insurance policies are renewable and convertible.

Whole life insurance has no predefined term; it provides death benefit protection over the “whole” life of the insured, as long as the premiums are paid.  A whole life policy also combines an investment component with the insurance component: it accumulates a cash value which the insured may withdraw or borrow against during their lifetime.  Compared to other forms of investing, life insurance policies tend to offer a relatively low rate of return.  Consult with someone knowledgeable about financial planning before choosing a whole life insurance policy.

Universal life insurance has a cash value determined by short-term interest rates versus the stated long-term rate of a whole life policy.  Premium payments in excess of the cost of insurance are added to the policyholder’s interest-bearing account.  Although interest rates will fluctuate, it cannot fall below the policy’s stated guaranteed interest rate.  Consult with someone knowledgeable about financial planning before choosing a universal life insurance policy.