A life insurance policy in essence is a contract that is made with an insurance company. The insurance company, in exchange for premium payments will provide you with a lump-sum payment; this is also referred to as a death benefit and is provided to the insurer´s beneficiaries upon the death of the insured.

Generally, a life insurance is chosen based off of the owner´s needs and goals. Term life insurance provides protection over a certain set time period, however, permanent insurance, such as universal life and whole life, provides coverage for a lifetime. It is important to note that generally death benefits of every type of life insurance are income tax-free.

There are quite a few types of life insurance; below we will briefly discuss the most common types:

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  1. Term Life Insurance

Term life insurance is designed to offer financial protection over a certain period of time, for example ten or twenty years. When it comes to traditional term life insurance, your premium payment remains the same over the period of coverage you choose. Once that period is over, policies may offer you continued coverage, this, however, will generally be provided at a premium payment rate that is substantially higher. Generally, term life insurance is not as expensive as permanent life insurance.

Needs It Will Meet

The proceeds from term life insurance cans be used to help replace any lost potential income throughout working years. This can provide your beneficiaries with a safety net and can also help guarantee that the financial goals of the family will be met,  goals such as paying your mortgage off, paying for college and keeping a business up and running. It is important to keep in mind that, even though term life insurance is able to be used as a replacement for lost potential income, life insurance benefits are paid out in a single payment, one lump sum, not in regular payments such as paychecks.

  1. Universal Life Insurance

Universal life insurance is a kind of permanent life insurance and it is designed to provide coverage for a lifetime. Universal life insurance policies, unlike whole life insurance, are more flexible, they even allow for the coverage amounts or premium payment to be raised or lowered throughout your lifetime. However, being as it is lifetime coverage; generally universal life insurance has premium payments that are higher than term life insurance.

Needs It Will Meet

The most common use for universal life insurance is as part of a flexible estate planning strategy, one that helps to preserve the wealth that is meant to be transferred to your beneficiaries. Long term income replacement is another common use for universal life insurance, where the need goes far beyond working years. Some product designs with universal life insurance focus on providing death benefit coverage as well as building cash value whereas other place their focus on providing death benefit coverage that is guaranteed.

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  1. Whole Life Insurance

Whole life insurance is another kind of permanent life insurance which is designed to provide coverage for a lifetime. Due to the fact that the coverage period does last a lifetime, usually whole life insurance has premium payments that are higher than term life insurance. Typically policy premium payments are fixed, and whole life insurance, unlike term life insurance, has a cash value, this works as a savings component which over time may accumulate tax-deferred.

Needs It Will Meet

You can use whole life insurance as an estate planning tool which can help to preserve any wealth you are planning to pass on to your beneficiaries.

The three most common life insurance policies are term life insurance, universal life insurance and whole life insurance. To better understand what life insurance that would work best for you and meet your personal needs, it is best to go over the details with a professional. He or she will be able to advise you on the choice that is best for you.