Buying a life insurance is an overwhelming job. To make it simple, it is important to understand the concept of life insurance, learn how it works and define your requirement so that you choose your coverage accordingly. A life insurance policy is a protection against financial loss resulting from the death of the insured. Technically, it is a contract between an insurance company and the policy owner in which the insurance company agrees to pay a death benefit to the beneficiaries of the policy upon the death of the insured in exchange of premium payment. The insurance company pays a lump-sum payment, called death benefit which is generally tax free.

Insurance companies offer life insurance policy quotes or the rates based on your needs and goals which help you compare and choose the best life insurance policy. Life insurance does not only provide risk coverage, but fulfills monetary needs and helps you grow your investments. Based on these diversified needs there are two types of life insurance policies; Term and Permanent. Let us discuss the most common types of life insurance.

Term life insurance provides financial coverage for a set period of time, such as 10 or 20 years. It is the most basic and cost effective policy. For traditional term insurance, the premium payment amount stays the same for the term. After that, policy may offer to renew, usually at a substantially higher premium payment rate. It's important to note that, term policy provides no value other than the death benefit in lump sum, if death occurs within the term of the policy.

Term Benefits:

Term life insurance earnings can be used to restore lost potential income during working years. It provides a safety net for beneficiaries and helps in meeting the family's financial goals like paying off a mortgage, keeping a business running, and paying for college.

Universal life insurance is a type of permanent life insurance that provides lifetime coverage with low premium and an investment savings feature known as cash value. It offers the flexibility to adjust death benefit and premiums. Like savings account it accumulates cash which earns interest as per the current interest rates. Policyholders may withdraw from accumulated cash without affecting death benefit or may borrow against accumulated cash without tax implications.

Universal Benefits:

Universal life insurance offers a guaranteed return on cash value and is most often used as a flexible estate planning strategy to help preserve wealth. Another common use is long term income replacement beyond working years. Universal life insurance product may either provide death benefit with building cash value or provide guaranteed death benefit coverage only.

Whole life insurance is a type of permanent life insurance that covers you for your entire life, that’s why it is called whole life policy. It has higher premium payments than term insurance because of the lifetime coverage period. Policy premium payments are normally fixed. Whole life has a cash value, which functions as a savings component and interest may accumulate on a tax-deferred basis.

Whole Benefits:

The cash value provides a living benefit to the policyholder and also serves as a source of equity for the policyholder.

Cost of a life insurance is determined by a number of factors like category you are assigned, coverage amount, term of the policy and life insurance policy type. Categories are defined during the underwriting process and these are determined by factors including overall health, family medical history, age, your lifestyle, driving record etc. An individual’s habits indicate his risk profile for example smokers get tobacco classification which shows health risk so you have to pay a higher premium.

A policyholder pays a recurring amount called premium to the insurer throughout the term of the life insurance policy. In case of the death of policyholder within the term of the policy, the insurer pays the tax free coverage amount called death benefit. The party who receives the death benefit is called the beneficiary of the policy, typically the family members. The death benefit helps the beneficiaries to meet their financial goals after the death of the policyholder.

In order to receive the insured amount after the death of the policyholder, the beneficiary has to file a claim with the life insurance company. It requires submission of death certificate, proof of identity, and a claim form with complete details of the claim and death information. The insurer may or may not contest the claim.

After going through the benefits of a life insurance policy, it is difficult to avoid it, because a financially safe future is the best gift you can give to your loved ones even when you are not around. So do your research well before selecting a life insurance policy best suited to you.