Life insurance is often purchased to replace income that potentially can be lost with the death of a wage earner. Life insurance policies work from the same basic idea - they help protect the financial security of your family in the event of your untimely death. You pay the insurer "premiums" and the insurer promises to pay your beneficiaries a death benefit when you die. At that time, your beneficiaries receive the death benefit in effect at the time of your death.
Why buy life insurance? It can help protect your beneficiaries' home and livelihood, help replace your income and minimize the debt load for your survivors. In addition, proceeds paid to beneficiaries are not subject to income tax.
Universal life offers flexibility. The amount of premiums may vary as long as the available cash value is sufficient to cover the costs of the policy. You also can opt to increase or decrease the amount of the death benefit while the policy is in force.
Variable universal life is designed with the flexibility of a universal life policy together with variable investment options. The cash value varies with performance of an underlying portfolio of investment options. You select how to allocate the net premium among investment options (subaccounts) offered. Subaccount values fluctuate with market conditions.
Whole life is traditional life insurance. Premiums are guaranteed in the policy for the entire time the policy is in force. You accumulate a cash value, but the insurance company determines the interest rate credited to the cash value.
Term life insurance is purchased for a specific term of years: one, five, 10 or longer. If you die during the term, your beneficiaries receive the death benefit. But, if you're still living when the policy expires, coverage ends and there is no payout.
One thing is true for all types of life insurance - the younger you are and the healthier you are when you purchase life insurance, the less it will cost you to own a life insurance policy. You should consider your life insurance needs when major events occur in your life such as marriage, the birth of your children or a business startup.