What Is Life Insurance?

New to buying life insurance? Learn how it works and what you need to understand to choose your coverage.

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.

There are many varieties of life insurance. Some of the more common types are discussed below.

Term life insurance

Term life insurance is designed to provide financial protection for a specific period of time, such as 10 or 20 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.

Needs it helps meet: 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.

Universal life insurance

Universal life insurance is a type of permanent life insurance designed to provide lifetime coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower your premium payment or coverage amounts throughout your lifetime. Additionally, due to its lifetime coverage, universal life typically has higher premium payments than term.

Needs it helps meet: Universal life insurance is most often used as part of a flexible estate planning strategy to help preserve wealth to be transferred to beneficiaries. Another common use is long term income replacement, where the need extends beyond working years. Some universal life insurance product designs focus on providing both death benefit coverage and building cash value while others focus on providing guaranteed death benefit coverage.

Whole life insurance

Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. Because of the lifetime coverage period, whole life usually has higher premium payments than term life. Policy premium payments are typically fixed, and, unlike term, whole life has a cash value, which functions as a savings component and may accumulate tax-deferred over time.

Needs it helps meet: Whole life can be used as an estate planningcc  tool to help preserve the wealth you plan to transfer to your beneficiaries.

Comparing Different Types of Life Insurance

America's Retirement Reality Check by Nancy Ellis and David Ellis

Needs It Helps Meet

Needs It Helps Meet

Term Life Insurance

Universal Life Insurance

Income replacement during working years

Wealth transfer, income protection

(Some focus on tax-deferred growth​)

Protection Period

Cost Differences

Designed for a specific period (usually a number of years)

Typically less expensive than permanent

Flexible; generally, for a lifetime

Generally more expensive than term


Typically fixed


Proceeds Paid to Beneficiaries

Yes, generally income tax-free

Yes, generally income


Investment Options

May Help Build Equity





Whole Life Insurance

Wealth transfer, preservation and, tax-deferred growth

For a lifetime

Generally more expensive than term

Typically fixed

Yes, generally income tax-free



© 2018 LAAM Partners Group. (License #0E55348)

Life insurance policies described, quoted, shown and illustrated throughout this website are not available in all states and may include those listed on our Carrier Domicile/Disclosure Page.



Financial & Insurance Services

6740 Fallbrook Ave. Suite 206

West Hills, CA 91307

P: 818.300.5592