The function of life insurance is to replace income for dependent family members after your death. There are two common types of life insurance: Term life insurance and whole life insurance.
Whole life is permanent insurance and is more expensive than term life because it has a cash value and the death benefit is guaranteed. The deviation in cost between term life and whole life is significant. Yearly premiums for whole life may be 15 to 20 times the premiums for term life depending on your gender, age, health and the amount of insurance you are buying.
Some policies pay a dividend, which is declared each year but is not guaranteed. The dividends can be used to increase the cash value of the policy or to reduce the premium.
Life insurance payouts generally aren’t taxable unless you have an estate that is greater than $5.45 million (in 2016), and the death benefit would become part of your estate. This tax may be avoided by setting up an irrevocable trust for your policy. No matter the size of the estate, payouts to spouses are never taxable, but they sometimes are to beneficiaries, such as children.
Additionally, if you cash out of your whole life policy, any proceeds that are more than what you have contributed to the policy are subject to income tax.
Jemma Everyday Wisdom: In the event of your death, life insurance can provide financial security to your family.