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Life insurance is a contract between you and an insurance company and is a way to protect your family in case of your death, by providing funds to pay outstanding bills, taxes and income loss. Under a Term Life contract, the insurance company promises to pay your beneficiaries a sum of money in the event that you die within a period of time defined in the contract (such as 5, 10, 15, 20 or 30 years). Under a Permanent Life contract, a portion of the money you pay in premiums is invested in a fund that earns interest on a tax-deferred basis. Over time, your policy will accumulate a "cash value" that you can use. For instance, you can borrow against the value of your policy. Moreover, you can design a Permanent Life contract that will accumulate enough cash so as to be "paid up" by a certain age (e.g., "Paid Up Age 65").
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Term insurance is like leasing a car. You purchase death benefits for a specified period --usually 5, 10 or 20 years. When the period is over, it's like turning in the leased car. The deal is done and you walk away. Term insurance pays a specific lump sum to your designated beneficiary if you should die during the term of the policy. The policy protects your family by providing money they can invest to replace your salary, and to cover immediate expenses incurred by your death. Term life insurance is best for young, growing families, when financial needs are especially low.
Permanent insurance is like buying a car you plan to drive forever. As long as you pay the premiums, permanent insurance stays in force as long as you live. It provides protection for your dependents by paying a death benefit to your designated beneficiary upon your death. In addition, a portion of your premiums are deposited into a tax-deferred cash value account that you can use while you are alive. Whole Life, Universal Life and Variable-Universal Life are examples of permanent life insurance.
