Death benefits paid in a single lump sum to a named beneficiary are typically not subject to federal income tax in the U.S. Estate tax may apply in some larger estates, and any interest earned if the payout is held by the insurer can be taxable. Talk to a tax professional about your specific situation.

Term life covers you for a fixed period (10, 20, 30 years) and pays out only if you die during the term. It is simpler and much cheaper. Whole life covers you for your entire life and includes a cash-value component that grows over time. Most people who need life insurance buy term; whole life serves narrower estate-planning and tax-deferral goals.