Life insurance is basically a contract between a client and an insurance provider. The essential purpose is for the insurance provider to pay an agreed lump sum to your nominated beneficiaries upon your death in exchange for the payment of regular monthly premiums. Life insurance is generally meant to serve as a safety net to ensure a family can remain in their home by paying for the mortgage, paying off debts, putting the children through school and college, and for everyday living expenses.

The Importance of Life Insurance
Life insurance is the best way to protect your loved ones and dependents when you are no longer there to care for them. Well-planned life insurance is the best way to ensure that the people who are financially dependent on you will have the ability to meet financial obligations after your death and the financial security that will allow them to maintain the lifestyle they were accustomed to before your death.

Different Types of Life Insurance
There are two main types of life insurance, permanent life insurance, and term life insurance.

Term Life Insurance
As the name implies, term life insurance is designed to provide financial protection for a certain period of time with premiums that remain the same throughout the life of the policy. It is a very popular option with more than 71% of people choosing term life insurance. If you die within the term of the policy the insurance provider will pay a tax-free death benefit to your beneficiaries.

Some term life policies allow you to renew the term once it has expired in increments of one year at a time, each year at a higher rate. This is known as Guaranteed Renewability. If you do not renew the policy at the end of the term it will expire with no refund of premiums unless you choose a Return of Premium type of policy.

Many people choose term life insurance to enable their beneficiaries to pay for expenses over a certain number of years should they no longer be there to earn and provide for a particular expense such as paying off a mortgage or putting a child through college. The most common length of term insurance policies purchased is 20 years but you can choose to cover periods of 5, 10, 15, 20, 25, and up to 30 years with some insurance providers offering longer terms of 35 and 40 years.

When buying term life insurance there are two main questions to answer:

• How long should the term be?
• How much insurance will I need?

The amount of life insurance you choose should match the obligations you wish to cover. Two of the top reasons why most people own term life insurance are to pay off a mortgage, or as income replacement for expenses that the deceased’s salary would have covered. For example, the cost of a $1million term life insurance policy for a person 55 years and a period of 20 years will cost:

• $2,824 for a female
• $2,060 for a male

Permanent Life Insurance
Permanent life, whole life, and universal life insurance are designed to last for the duration of the insured’s life. Upon your death, a cash amount called a death benefit will be paid tax-free to your nominated beneficiaries. Some policies offer the flexibility of adjusting the premium payments and death benefit of the policy depending on your requirements.

This type of life insurance usually has a cash value component that accumulates on a tax-deferred basis throughout the life of the policy. This acts as a type of savings fund that you can borrow against in the form of a cash withdrawal. If you decide to terminate the policy you will be paid the accumulated cash value minus a surrender charge levied for early cancellation.

You can add a variety of riders and features to your policy at an extra cost. An accelerated death benefit is usually added on at no additional cost that will allow you to draw money from your death benefit if you have a terminal illness. Other riders include chronic illness and long-term riders for certain health conditions.

There are many types of life insurance policies available and many varieties within each type. Choosing from such a large array of options may seem overwhelming but if you keep your focus on the reason why you need life insurance it will help you pinpoint exactly the right type for you.