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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 premiums (payments), the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries in the event of 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

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. Typically, premiums are level and guaranteed for that time. After that period, policies may offer continued coverage, usually at a substantially higher premium rate. Term life insurance is generally a less costly option than permanent life insurance.

Needs it helps meet: Term life insurance proceeds are most often used to replace lost potential income during working years. This can provide a general 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 another 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 or coverage amounts throughout your lifetime. Like whole life insurance, universal life also has a tax-deferred savings component, which may build wealth over time. Additionally, due to its lifetime coverage, universal life typically has higher premiums than term.

Needs it helps meet: Universal life insurance is most often used as 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 premiums than term life. Policy premiums 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.

Fidelity does not currently offer whole life insurance.

Needs it helps meet: In addition to providing lifetime coverage, whole life is commonly used to accumulate tax-deferred savings. Whole life can also be used as an estate planning tool to help preserve the wealth you plan to transfer to your beneficiaries.

How cost is determined

Insurers use rate classes, or risk-related categories, to determine your premiums; these categories don't, however, affect the length or amount of coverage.

Traditional rate classes are:

  • Standard: Good health, average cholesterol, relatively low-risk lifestyle
  • Preferred: Very good health and family medical history, low cholesterol, low-risk lifestyle
  • Super-Preferred: Excellent health and family medical history, very low cholesterol, low-risk lifestyle

Your rate class is determined by a number of factors, including overall health and family medical history and your lifestyle. Tobacco use, for example, would increase risk and therefore cause your premium to be higher than that of someone who doesn't use tobacco.

Next step

Determining your coverage need
Learn strategies for choosing the right amount of coverage.

What we offer

1. Estate taxes may apply to insurance proceeds. 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. Fidelity does not provide legal or tax advice. Always consult with an attorney or tax professional regarding your specific legal or tax situation.
2. Only variable universal life offers investment options; Fidelity does not currently offer this type of coverage.
3. Fidelity Investments Term Life Insurance (Policy Form Nos. FTL-96200, et al. and FTL-99200, et al.) and in New York, Empire Fidelity Investments Term Life Insurance (Policy Form No. EFTL-99200, et al.) Fidelity Insurance Agency, Inc., is the distributor.
Fidelity insurance products are issued by Fidelity Investments Life Insurance Company (FILI), 100 Salem Street, Smithfield, RI 02917, and, in New York, by Empire Fidelity Investments Life Insurance Company,® New York, N.Y. FILI is licensed in all states except New York. Other insurance products available at Fidelity are issued by third party insurance companies, which are not affiliated with any Fidelity Investments company. Fidelity Insurance Agency, Inc. is the distributor. A contract's financial guarantees are subject to the claims-paying ability of the issuing insurance company.
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