There are many uses of life insurance. The overriding reason for buying life insurance is to provide an income for the policyholder’s beneficiary or beneficiaries in the event of premature death.

However, it is also purchased for many other uses. Life insurance is frequently purchased to pay off a policyholder’s outstanding loans at the time of death, leaving the dependents free of debt. A special type of insurance, called credit life insurance, is regularly offered by lenders to individuals who take out a loan. Credit life insurance, which adds to the cost of the loan, pays off the outstanding balance on a loan in the event the borrower dies.

Life insurance proceeds may be utilized to pay estate taxes. Individuals who expect to leave a substantial estate may purchase life insurance to provide for the payment of federal and state taxes that will be levied on their estate, saving the heirs from being required to liquidate assets to pay taxes. Purchasing life insurance to provide for charitable bequests is another way to produce tax savings. When life insurance is purchased with benefits payable to a charitable organization of choice, the heirs receive a slightly diminished estate (by the amount of insurance premiums paid) rather than an estate that is substantially reduced by the charitable bequest.

Life insurance can be used to ensure that college education funds are available in the event of the premature death of the policyholder.
Some individuals purchase life insurance more for the savings they will accumulate than for the financial protection the insurance provides. Certain types of life insurance include savings that are sheltered from income taxes until funds are eventually withdrawn. Substantial savings may accumulate on life insurance policies purchased at a young age.

Life Insurance Products

Although an array of life insurance products have been developed, all life insurance policies fit into one of two major categories: those that do not include savings and those that do.

The term life insurance policy is a contract that provides life insurance protection for a limited period of time. It does not accrue savings for the policyholder. The death benefit is usually sold in $1000 units and is payable only if death occurs during that term presented by the insurance contract. The term periods are in years—typically, one year, three years, five years, ten years or twenty years.
Whole life insurance, sometimes called level premium insurance or cash value life insurance, is a combination of decreasing term insurance and a savings pool that increases over time. These types of policies have two primary characteristics in common. The first is that premiums are level and do not increase with age. The second is that the policy provides lifetime protection.

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