What is life insurance?

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Life insurance is a legally binding contract between an insurer and a policy holder. The purpose of a life insurance policy is to guarantee that the insurer will pay some specified sum of money to named beneficiaries in the event that the insured policy holder passes. This is done in exchange for the premium(s) that the policy holder pays to the insurer over the course of the insured’s lifetime.

Life Insurance Explained

In order for a life insurance policy to remain enforceable, the insured must accurately and honestly disclose their past and current health conditions, in addition to any high-risk activities that they are involved with. Additionally, the policy holder must pay either a single premium up front or pay regular premiums over time for the life insurance policy to remain intact.

There are essentially two broad types of life insurance policies – Term Life Insurance and Permanent or Whole Life Insurance – but each one also has multiple variations that individuals can choose. Term life insurance will last for a specified number of years and once those years are up, the policy ends. The insured policy holder chooses the term with common terms being 10, 20, or 30 years. Permanent or whole life insurance remains active for the extent of the insured’s life unless the policy holder decides to stop paying the premiums or surrenders the life insurance policy. This type of life insurance policy is, on average, more expensive than a term life insurance policy.

Components of Life Insurance

Term life insurance policies have two main components – a Death Benefit or Face Value and a Premium. The death benefit is the amount of money that the insurer guarantees to the named beneficiaries in the policy when the insured passes. The premium is the money that the policy holder pays for the life insurance policy. The premium can either be a single sum total paid up front or a series of payments made by the policy holder over their lifetime. The insurer is required to pay the death benefit to the named beneficiaries if the premium(s) have been paid in full.

Permanent life insurance policies have three main components – a Death Benefit, Premium, and Cash Value. The cash value component serves two purposes. First, the policy holder can use it as a savings account over the life of the insured. Second, the policy holder can use the cash value to either pay premiums or to purchase additional insurance. Therefore, the cash value component of permanent life insurance acts as a living benefit.

Simply, life insurance is a contract between an insurer and a policyholder that guarantees that the insurer will pay some sum of money to the named beneficiaries when the insured passes.