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How Life Insurance Works and Its Different Types

Most individuals have some form of insurance whether it is for their vehicle, home or health. But it is important, however, not to overlook the benefits of life insurance which pays money to beneficiaries when the insured dies.


Typically, the insured person makes payments into the plan – called premiums – in exchange for a “death benefit,” the money that is paid at the time of death. If you are considering purchasing life insurance there are a few potential problems you need to be aware of.


There are numerous types of policies you can choose, but life insurance policies generally fall into three categories – protection, long-term savings and estate conservation.

Many people purchase life insurance for the purpose of providing for their dependents in the event of their death thus protecting your existing stream of income. If you are in the protection category you may want to consider term life insurance which offers only a death benefit for a specified period of time such as until you retire.

If long term savings is your reason for purchasing insurance, you may consider a cash value policy. With this type of life insurance, your beneficiaries receive a payment upon your death based on the full amount of coverage, not the cash value of the plan. The value of these plans is usually tied to an underlying investment portfolio and that is how funds accumulate.

Another added benefit is that these policies usually allow a holder to borrow from the accumulated funds in the plan without taxes or penalties. Depending on the policy, you can typically withdraw a portion of cash value and not pay it back or even cancel the policy and receive the money that has been accumulated over the years.


Life insurance can also be used as an estate planning tool especially if your goal is to preserve wealth for future generations. This type of policy covers one or two lives; the cash generated by these plans typically helps your heirs pay estate taxes and provide otherwise.

Now you have to decide how much coverage you need to provide the amount of income your family will need in the event of your death. After all, your goal in purchasing life insurance most likely is to ensure that income continues for those who are now dependent upon your income.


It also is important not to ignore the need for life insurance protection in a single or dual income family. The death of either spouse could create a financial strain on your family.