What is Life Insurance?
Life insurance policies pay out a sum of money to the policy's beneficiary when the policyholder dies, assuming premiums have been paid on time. Life insurance payouts are commonly used to help cover funeral costs and the loss of income associated with the policyholder's absence. However, the funds may be used any way the beneficiary decides.
Types of Life Insurance
There are two main types of plans: term life and permanent life.
- Term life insurance is the most common type of life insurance. With term life insurance, you pay a monthly premium to get coverage for a specific period of time (usually between five and 30 years). Term policies are usually less expensive than permanent life insurance policies.
- Permanent life insurance provides coverage for your entire life, as long as the premiums are paid. Permanent policies have a cash value component that works like a savings account. The account builds value that can be borrowed against or withdrawn.
How it Works
According to Investopedia,"Life insurance is a contract between an individual with an insurable interest and a lie insurance company to transfer the financial risk of a premature death to the insurer in exchange for a specified amount of premium."
The three main components of a life insurance contract are:
- The death benefit — the amount of money the policy beneficiary receives from the insurer when the policyholder dies.
- The premium payments — The amount that the policyholder pays monthly for his or her policy. The specific amount of a premium may depend on the policyholder's age, lifestyle, current health and family medical history.
- The cash value — in the case of permanent life insurance policies) — Permanent life insurance policies have a cash value component that can be used while you are alive.
According to Tim Maurer with Forbes, it’s crucial to buy life insurance if anyone relies on you. No matter how old you are, it’s important to talk about life insurance plans with your family, business partners, and those you may leave behind one day.
Life insurance can be used:
To make up for lost income and provide for your family in your absence
To pay estate taxes
To cover educational expenses
To pay your mortgage and other debt
To pay for funeral and burial costs
- To pay medical bills and other end-of-life expenses
Note: as mentioned, the policy's beneficiary can use the death benefit any way they wish.
Speak With an Agent
*Applications for insurance may be subject to acceptance by insurer. Rates and coverage amounts will depend upon the carrier selected.