The two basic types of life insurance are term and cash value. Term insurance can be thought of as "renting insurance." In other words, it covers the risk of the loss of someone's life for a specific period of time (e.g., 10 years). When that time period is up, the insurance ends. Thus, the sole purpose of term insurance is to provide protection for beneficiaries if someone dies within a specific period of time.
Cash value insurance provides both insurance protection and a cash accumulation feature. Thus, part of each premium is used to pay for the insurance component and part of it is applied to a cash reserve which helps support the policy in its later years. This cash reserve grows over time and can be borrowed against or used as collateral for a loan. Policy beneficiaries receive the face value of the insurance upon the death of the insured. However, the amount that is received by beneficiaries can be impacted by features of the insurance policy, such as a loan against the accumulated cash value.
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