Your need for life insurance will always be dependent upon your personal life goals and financial obligations. As your life circumstances change, your life insurance coverage will likely need to change as well. After all, someone who is single and retired is likely to have very different life insurance needs than someone who is young and married with children.

At the most basic level, life insurance, like any other insurance policy, is a contract you sign. You agree to pay a monthly premium to a life insurance company, and in turn, they ensure that upon your death, they will pay out a predetermined lump-sum payment to your beneficiaries. This payment is known as a death benefit and is usually federally tax free.

Ways to purchase life insurance

Group of kids on a baseball field in black and whiteLife insurance can be purchased in two ways: individually or as part of a group. Individual life insurance is paid by one person and covers only that one person, whereas group life insurance covers a group of employees or the members of an organization.

Group life insurance is typically more cost effective than individual life insurance because the risk of death is distributed among a group of people rather than being concentrated in a single individual – and the policyholder can take advantage of the savings that come along with that. It does have some potential drawbacks, though, as group policies tend to give policyholders less flexibility in terms of the ability to choose the specific type of coverage they want. With group life insurance, the policyholder has to settle with the coverage that is offered, although they do have the option to expand coverage by paying additional premiums. Individual policyholders, meanwhile, can almost always tailor their life insurance plans to cover exactly what they want.

Types of individual life insurance

Term Life Insurance

Term Life Insurance provides protection for a specified period of time. In other words, you would choose to be covered for a particular number of years, say 10 or 20, or until you turn a certain age. With term life insurance, the initial cost is lower; however, premiums will increase as you age.

Term life insurance policies are most often purchased by individuals who wish to ensure that their spouse and children are financially secure if the policyholder were to pass away during their working years. Although the death benefit would be paid out in a single lump-sum, as opposed to regular installments like a paycheck, it provides a safety net for beneficiaries and helps to ensure your family’s financial needs can still be met. Often the payouts are used for things like paying off a mortgage, keeping a business running, and paying for college.

Whole Life Insurance

Unlike term insurance, whole life insurance – a type of permanent life insurance – has no specified term and provides lifetime coverage, assuming the policy conditions are met. A whole life insurance policy accumulates cash value over time, comes with a fixed rate, and requires premiums to be paid for as long as the insured lives. Because of this, the premiums are generally higher than they are with term insurance.

These types of plans can also function as a savings component and may accumulate tax-deferred over time. If you have wealth that you would like to preserve and eventually transfer to your beneficiaries, a whole life insurance policy can be used as an estate planning tool to ensure that goal is met.  

Universal Life Insurance

If you’re looking for lifetime coverage but need something a bit more flexible, universal life insurance is likely the answer you’re looking for. It is another type of permanent life insurance, like whole life insurance, it is designed to provide lifetime coverage and often comes with a higher premium price tag than a term policy. But unlike whole life insurance, universal life insurance policies are quite flexible. Rather than having to lock into a fixed rate for life, it allows you to adjust your premium payments or coverage amounts throughout your lifetime.

Because of its flexibility, some universal life insurance policies are designed to both provide death benefit coverage and build cash value, while others focus solely on providing guaranteed death benefit coverage. As such, not only does it work well as part of an estate planning strategy to help preserve wealth to be transferred to beneficiaries, it can also be used as long-term income replacement, where the need for income extends beyond traditional working years.