A life insurance policy is a contract with an insurance company. In exchange for premiums (payments), the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries in the event of the insured's death.

Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free.

There are many varieties of life insurance. Some of the more common types are discussed below.

Term life insurance

Term life insurance is designed to provide financial protection for a specific period of time, such as 10 or 20 years. Typically, premiums are level and guaranteed for that time. After that period, policies may offer continued coverage, usually at a substantially higher premium rate. Term life insurance is generally a less costly option than permanent life insurance.

Needs it helps meet: Term life insurance proceeds are most often used to replace lost potential income during working years. This can provide a general safety net for your beneficiaries and can also help ensure the family's financial goals will still be met—goals like paying off a mortgage, keeping a business running, and paying for college.

It's important to note that, although term life can be used to replace lost potential income, life insurance benefits are paid at one time in a lump sum, not in regular payments like paychecks.

life insurance

Universal life insurance

Universal life insurance is another type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium or coverage amounts throughout your lifetime. Like whole life insurance, universal life also has a tax-deferred savings component, which may build wealth over time. Additionally, due to its lifetime coverage, universal life typically has higher premiums than term.

Needs it helps meet: Universal life insurance is most often used as a flexible estate planning strategy to help preserve wealth to be transferred to beneficiaries. Another common use is long term income replacement, where the need extends beyond working years. Some universal life insurance product designs focus on providing both death benefit coverage and building cash value while others focus on providing guaranteed death benefit coverage.

Whole life insurance

Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. Because of the lifetime coverage period, whole life usually has higher premiums than term life. Policy premiums are typically fixed, and, unlike term, whole life has a cash value, which functions as a savings component and may accumulate tax-deferred over time.

Fidelity does not currently offer whole life insurance.

Needs it helps meet: In addition to providing lifetime coverage, whole life is commonly used to accumulate tax-deferred savings. Whole life can also be used as an estate planning tool to help preserve the wealth you plan to transfer to your beneficiaries.

If you want to start an argument, ask a group of financial advisers what they think about buying life insurance for children.

To some, it's a great, low-cost way to set money aside for the future and to make sure he'll have insurance as an adult, in case an illness later in life makes him uninsurable. Others say it's an outdated product that has been replaced by more effective savings tools, such as 529 plans. Still others say that since the purpose of insurance is to replace a wage-earner's income, it's inherently wrong to sell insurance on someone who doesn't have a job.

According to research from the American Council of Life Insurers, life insurance for children isn't a popular purchase. They report that only about 15 percent of people under the age of 18 have life insurance, a percentage that has stayed steady for more than a decade. The average amount of coverage on children is small, usually in the range of $5,000. Many companies will tack on a small amount of insurance to a parent's policy, essentially to cover burial costs.

should buy life insurance for kid?

Still, it's a commonly asked question and many parents aren't sure what to do, if anything.

"Most folks are torn," says Victor Gainor, second vice president of individual insurance products for TIAA-CREF, a life insurance company for teachers and their families.

He bought modest whole-life insurance policies for both of his children, along with opening 529 plans and setting up mutual funds. He did it primarily, he says, as a way to make sure that they'll always have some insurance and to have some cash available if his family gets in a jam.

"I didn't buy it to make money; I bought it to give to them while I have my other bases covered," he says. "I can also access the cash values that are accruing and use it for tuition or whatever I need to do for my family."

There's even disagreement about the kind of insurance that should available for children. TIAA-CREF won't sell term insurance on children, saying it "flies in the face" of the mission of the organization because it doesn't provide the policyholder with a way to accrue cash value.

Sestina sees other investments, such as Roth IRAs, as making more sense for building wealth for kids.

The future insurability issue

The only reason he can see for buying life insurance for children is if there's a family history of health problems, such as diabetes or heart disease, that might make it tough for them to get insurance when they're in their prime income-earning years.

"If your child has the potential for health problems, you'll have to buy a ton -- at least a million dollars," he says.

Since it's impossible to determine how much a child will make in the future, Sestina recommends using your own income as a guideline. The cheapest deal, he says, is on a 20-year policy. Try to get one that is renewable and has the option of converting to whole life insurance.

Since many insurance companies don't sell high-quality term insurance for children, Sestina recommends having an independent agent find a good policy for you.

Dave Christopher is vice president of risk product management for Thrivent Financial for Lutherans, a fraternal benefits society that uses life insurance and other investments to support the Lutheran denomination.

Many of his members buy cash-value policies for their children because of the insurability issue. A $10,000 policy bought for a child can be increased to $280,000 worth of coverage as an adult without medical testing.

Thrivent also markets the policies as a way to invest money on a tax-deferred basis. Since it's the gains on the investment that are taxed, the first withdrawals are from the premiums, which are tax-free.

"If you've accessed all the premium, you can take out loans against the gains on a tax-free basis as well," he says

Naming who should get the life insurance money after you die sounds simple, but designating beneficiaries can get tricky.
Mistakes are common, financial advisers say -- and they can be heartbreaking and expensive.
When mistakes are made "you're not creating problems for you," says Keith Friedman, principal of FBO Strategies, an estate planning and insurance firm in Stamford, Conn. "You're creating problems for the people you leave behind."
Here are 10 life insurance beneficiary mistakes to avoid.
1. Naming a minor child
Life insurance companies won't pay the proceeds directly to minors. If you haven't created a trust or made any legal arrangements for someone to manage the money, the court will appoint a guardian, a costly process, to handle the proceeds until the child reaches 18 or 21, depending on the state.
Instead, you can leave the money for the child's benefit to a reliable adult; set up a trust to benefit the child and name the trust as the beneficiary of the policy; or name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act. Consult an estate attorney to decide the best course.
2. Making a dependent ineligible for government benefits
Naming a lifelong dependent, such as a child with special needs, as beneficiary puts the loved one at risk for losing eligibility for government assistance. Anyone who receives a gift or inheritance of more than $2,000 is disqualified for Supplemental Security Income and Medicaid, under federal law.
Work with an attorney to set up a special needs trust, and name the trust as beneficiary. A trustee you appoint will manage the money for the dependent's benefit.
Here's more on life insurance planning for parents of children with special needs.
3. Falling into a tax trap
Life insurance death benefits are generally tax-free -- except when three different people play the roles of policy owner, the insured and the beneficiary. In that case, the death benefit could count as a taxable gift to the beneficiary, says Amy Rose Herrick, a Chartered Financial Consultant and life insurance agent with offices in the U.S. Virgin Islands and Tecumseh, Kan.
Say, for instance, a wife owns a life insurance policy on her husband's life and names their adult daughter as beneficiary. The wife effectively is creating a gift of the policy proceeds to her daughter, Herrick says. The person who makes the gift -- the wife -- is the one who would be subject to the tax, if the amount of the gift exceeds federal limits.
The problem could be avoided in most cases by having the husband own the policy, insuring himself. However the situation can get tricky in community-property states. Consult a financial adviser to decide the best way to structure the policy.
4. Assuming your will trumps the policy
A life insurance policy is a contract. Regardless of what your will says, the life insurance money will be paid to the beneficiary listed on the policy. That's why it's important to contact your insurer to change your beneficiary if needed.
See more information on wills vs. life insurance policies: Who's the boss?
5. Forgetting to update
"Designating beneficiaries are not 'set it and forget it' events," says Tara Reynolds, vice president at MassMutual. You should review your policy every three years and after major life events, such as marriage, having children or divorce. Change the beneficiaries when circumstances change.
Unfortunately, many people forget to do so.
"Half of my practice is second or third marriages," says Peter Blatt, a tax attorney and financial adviser in Palm Beach Gardens, Fla. "It's not uncommon to find the ex-spouse still listed as beneficiary on the life insurance policy" when reviewing a client's portfolio.

10 ways to screw up life insurance

6. Neglecting details
Beneficiaries: 
By branch or by person?
You want to leave life insurance money to your kids and grandkids, and you want it divided evenly.
But how?
There are two ways of distributing the money -- per stirpes and per capita. You can specify either method on the life insurance policy, and both are acceptable options when naming beneficiaries, says Ed Graves, a professor of insurance for The American College in Bryn Mawr, Pa. "But the possible outcomes can be drastically different from one approach to the other."
Per stirpes means the proceeds are divided by branch of the family, and per capita means they are divided by head.
Say, for instance, you want to leave the money to your two children, Bob and Sue, or to your grandchildren if Bob or Sue predeceases you. Bob has three children and Sue has one child. Now suppose Bob dies before you do.
Under per stirpes, half the money would go to Bob's three children, and half would go to Sue. Under per capita, the money would be divided equally among Bob's three children and Sue; each would get 25 percent.
Choose the distribution method to match your intentions. Graves recommends you diagram the possible scenarios.
"Complex situations should probably have an attorney involved," he adds.
Be specific when you name beneficiaries. Instead of "my children," list their names, Social Security numbers and addresses, says Ed Graves, a professor of insurance at The American College in Bryn Mawr, Pa.
Otherwise, "the insurance company has to launch a search and that can take a lot of time," Graves says.
When naming multiple beneficiaries, decide whether you want the money divided "per stirpes," which means by branch of the family, or per capita, which means by head. (See sidebar.)
7. Staying mum
"The most important thing is to tell someone so they know you have a life insurance policy, where it is and how to find it," says Joshua Hazelwood, vice president at MassMutual.
Open communication with beneficiaries now can save a family from chaos later - or even worse, never claiming the benefit.
8. Giving money with no strings attached
Naming your young-adult children as beneficiaries without setting any conditions for how the money is dispersed can be a setup for financial failure. How many 18- or 21-year-olds can handle a huge influx of cash? One way is to set up a trust with specifics for how the money can be released and what it can be used for until the young adult reaches a certain age.
"It allows me as a parent to instill what I feel is valued in my absence," Friedman says. "I don't want to leave my children with millions of dollars when they're 18 with unfettered access."
Insurers are beginning to introduce policies that let you arrange for the death benefit to be paid out in installments. Minnesota Life Insurance Co.'s new indexed universal life product, Omega Builder IUL, includes that option, calling it an "income protection agreement."
9. Naming only a primary beneficiary
"Most people just think they're going to make their spouse beneficiary, but don't take into account the spouse might predecease them," Friedman says. "It's conceivable that something would happen to you and your spouse together."
Blatt says he even sees cases where people fail to name any beneficiaries. When there is no living beneficiary, the life insurance benefit typically goes into the estate and is subject to probate. That leads to two complications. One, heirs might face a long wait to get the money. Two, the life insurance proceeds, which normally would be protected from creditors, now can be used to pay off creditors.
Advisers recommend naming secondary and final beneficiaries. If the primary beneficiary dies before you do, then the money passes to the secondary beneficiary. If the secondary beneficiary has passed away when you die, then the death benefit goes to the final beneficiary.

Once a person is diagnosed with diabetes, life insurance policies sold can become unaffordable or unavailable. This is because life insurance policies are allowed by state and federal law to "rate" or charge a premium based upon an applicant's health status. In addition, a plan can choose to not provide a policy based upon an applicant's health status.
Even so, it is possible for many people with diabetes to find affordable life insurance policies within the United States. You just have to know where to look. Certain insurers, or carriers, specialize in selling policies to people with chronic health conditions like diabetes.
To find the best life insurance policy for you, please consider the following:

• A major factor in the cost of insurance policies for people with type 1 or type 2 diabetes is how well they manage their diabetes. If you have a lower A1C, good blood glucose control, lead a healthy lifestyle, and do not have complications from diabetes, chances are your rate will be more reasonable too.
• Find an insurance agent that is experienced in obtaining policies for individuals with "impaired risk" -- they will know what carriers may offer you a policy and which one(s) may not.
• Apply for a policy with a insurers that uses "clinical underwriting" -- a process that looks at your total health, not just what health conditions you may have.
• Shop around -- on the internet, by phone, or through referrals from family and friends. Becoming your own advocate will help you to find a life insurance policy that best fits your needs.
• Never take NO for an answer. Just because one company rates or declines your application does not mean that another company will not look at you more favorably.

Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance

One of the most common reasons for buying life insuranceis to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?

Your life insurance needs will depend on a number of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions:

·        What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?

·        How much of your salary is devoted to current expenses and future needs?

·        How long would your dependents need support if you were to die tomorrow?

·        How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children?

Since your needs will change over time, you'll need to continually re-evaluate your need for coverage.

How much life insurance can you afford?

How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What's in a life insurance contract?

A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits.

The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies

The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories:

·        Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. The policyowner's only action after purchase of the policy is to pay the fixed premium.

·        Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time.

·        Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.

·        Universal variable life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts.

Choosing and changing your beneficiaries

You must name a primary beneficiary to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. If you name your minor child as a beneficiary, be sure to designate an adult as the child's guardian in your will.

Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.

Where can you buy life insurance?

You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.

Reading about different kinds of life insurance policies is quite a task, especially nowadays when every insurance company has got a couple of variations in policies on their own in order to attract more customers. Although these new policies only differ from the old ones in few details, they can leave the potential customer confused. With dozens of policies to choose from, we’ve decided to pick the most popular ones and try and explain the main differences between them and point out their virtues and flaws to help you with your decision.

When starting, first you need to think about the reasons you want to get life insurance in the first place. If you’re in your early 30s and still don’t have a family, this shouldn’t be on your list of priorities. But if you’re the sole provider of your household and have several members that are financially dependent of your income, getting a life insurance should be on top of your list of priorities. These investments, no matter how uncomfortable to think about, are the responsibility of any adult that wants to ensure his family is financially secured even after their death.

Now we’re gonna try and cover some of the most popular life insurance policy types that people choose, with the accent being on choosing between short term and long term policies.

Term of life insurance

As the name indicates, this kind of insurance is only valid for a certain amount of time. Different insurance companies have different time frames for these contracts that go from one year to forty or more. If the person insured dies within the time frame covered in the contract, the beneficiaries get paid the sum called the death benefit. This sum is fixed and doesn’t change over time, but if the contract expires, the insured in no longer covered. One of the biggest disadvantages of this type is that premiums the insured has to pay increase over years, due to the fact that they’re more likely to die the older they get. While some insurance companies raise the premiums every year, others do it on a 5 year or 10 year basis, depending on the contract.

Whole life

The opposite to term life insurance is whole life, which is valid through the insured person’s life no matter how many years pass until they pass away. While term insurance contracts can be canceled at any time, whole life contract can only be canceled due to the insured failing to pay the premiums. Many people list the lack of flexibility as one of the main downsides of this type of insurance. The other big downside is the fact that whole life insurance costs way much more than term insurance, because there is a cash value in the policy, unlike with the term insurance. This means that the insured has a sort of fund he can use to borrow money from or pay premiums in the latter years, at the cost of his death benefit getting diminished by the amount borrowed plus additional charges.