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What is Life Insurance?

A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon 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.¹

Term life insurance

Term life insurance is designed to provide financial protection for a specific period of time, such as 10, 20 or 30 years. With traditional term insurance, the premium payment amount stays the same for the coverage period you select. After that period, policies may offer continued coverage, usually at a substantially higher premium payment rate. Term life insurance is generally less expensive than permanent life insurance.

Term life insurance proceeds can be used to replace lost potential income during working years. This can provide a 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.

Permanent Life Insurance

Permanent life insurance is designed to provide protection for your lifetime. As long as premiums are paid, and the policy is in force the benefits will be paid to the beneficiaries set forth in the policy. Dependent on the policy features you may have flexibility to raise or lower premiums and death benefits or these items may be fixed for the life of the policy.

Permanent policies typically have a cash value component associated with it that may assist in accumulating tax-deferred growth over time. These types of policies are typically higher premium than a Term policy which is due to the lifetime coverage features of the policy.

1. Estate taxes may apply to insurance proceeds. Fidelity does not provide legal or tax advice. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Consult with an attorney or tax professional regarding your specific legal or tax situation.