Life Insurance Basics

Life Insurance is divided into two major categories: Term Life Insurance and Permanent Life Insurance.

Term Life Insurance (or "Term Insurance") is the simplest form of life insurance, and is typically the least expensive. The premium is usually lower than other forms of insurance because no cash value is accrued.

There are two basic types of Term Life Insurance policies: Level Term and Decreasing Term. With Level Term Insurance, the death benefit stays the same throughout the duration of the policy, while the death benefit for a Decreasing Term policy drops over the course of the policy's term. Term Insurance pays a benefit only if death occurs during the term of the policy, which is usually from one to 30 years. If death occurs after the term of the policy, no benefit is paid.

Permanent Life Insurance (also known as "Whole Life Insurance") is a more complex form of life insurance. The premiums are usually higher than those of a Term Life insurance policy.

In addition to the death benefit, Permanent Life Insurance offers a savings component, known as a Cash Value Account. The monies paid on the policy are split between premium and savings. The money saved in the Cash Value Account grows on a tax-deferred basis. Although the premiums for Permanent Life Insurance tend to be higher than those for Term Life Insurance, one of the primary advantages is that the death benefit is not limited to a pre-determined timeframe.

There are three major types of Permanent Life Insurance: Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance.

This article adapted from information provided by the Insurance Information Institute.