Life Insurance

What is Life Insurance?

Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment.

Types of Life Insurance

When you start looking for life insurance, you’ll face two main decisions right away: What type of life insurance is best for me? And how much life insurance do I need?

As you get life insurance options and quotes, you’ll likely navigate toward a type and coverage amount that’s in line with how much you want to pay.

What type of life insurance is best for you? That depends on a variety of factors, including how long you want the policy to last, how much you want to pay and whether you want to use the policy as an investment vehicle.

What are the basic features of a life insurance policy?

At its core, a life insurance policy is a promise: to provide financial protection to your loved ones if you’re not there. The way a policy carries out that promise is defined by a few key features:

The death benefit: The amount of money the insurance company will pay when the insured person dies. Typically, this benefit is income-tax free.
The beneficiaries: The person or people who get the death benefit. It can all go to a single person (e.g., a surviving spouse), or it can be divided by percentage among a few people (e.g., a spouse could get 50%, and two adult children could each get 25%). And by the way, a beneficiary doesn’t have to be a blood relative or even a person – if you choose, you can leave all or part of your death benefit to an entity, such as a charitable cause.
The policy length or term: The time period that the insurer agrees to pay a death benefit. In a term policy, it’s defined as a specific number of years, such as 10, 20, or 30. A permanent policy lasts for the life of the insured, for whole life as long as premiums are paid, and for universal life as long as the policy is funded properly to pay monthly expenses.
The premium – The monthly or yearly payments needed to keep the policy in effect.
The cash value – The policy’s investment component that builds over time and can be cashed out or borrowed against.^{1, 2} A term policy has no cash value.

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