“What is life insurance?” is a common question for many adults. If you are trying to get an understanding of life insurance without getting overwhelmed, start with this article. The life insurance information provided below will explain:
- What life insurance is
- The main parts of a life insurance policy
- The main people involved in a life insurance policy
- The main types of life insurance policies
What Is Life Insurance?
Life insurance, by definition, is a contract between an individual and a life insurance company. In this contract, the individual shifts the financial risk of an unexpected death onto the life insurance company. In exchange, the life insurance company receives a specified payment.
As a follow-up question, you might ask, “What is life insurance for?” Life insurance is designed to protect your family and loved ones against financial loss. In the case of your unexpected death, life insurance can provide money to help pay medical and funeral expenses, loans, outstanding debt, and more. Unlike with life insurance, death benefits can be used for any purpose the beneficiary sees fit. So, for a family, life insurance can help continue a planned quality of life.
What do Life Insurance Policies Include?
There are three main parts of a life insurance policy: a death benefit, a premium, and (for some policies) cash value.
- A death benefit is the amount of money that an insurance company will pay upon the death of the policy owner. The death benefit will be chosen and agreed upon when the policy is signed.
- A premium is the price of coverage, usually a monthly or yearly expense. As long as the premium continues to be paid, the life insurance company will pay the death benefit.
- If you’ve asked yourself, “What do life insurance companies do with premiums?” here is a simplified answer. They use the premiums they collect to pay out claimed death benefits, pay business costs, and make profit.
- Cash value is a feature of permanent life insurance policies. Cash value is an earning component that can accumulate value and be used during the policy holder’s lifetime.
Who Is Involved in a Life Insurance Policy?
There are four parties involved in a life insurance policy: the life insurance company, the owner, the policy holder, and the beneficiary.
- The life insurance company is the company you contract with. They are responsible for paying out death benefits.
- The owner is the person who owns the life insurance policy, whether or not they are covered by that policy. They are responsible for paying the policy premiums.
- The insured person is the individual covered by the life insurance policy. They are not always the policy owner.
- The beneficiary is the person (or entity) who will receive the death benefit.
What Are the Types of Life Insurance?
Life insurance information about the types of policies can get complicated. To keep this explanation simple and easy to understand, let’s stick to the basics. There are two main categories of life insurance: term and permanent.
- Term life insurance tends to be simpler and less expensive than a permanent policy. These life insurance policies are given a period of time (usually 10 to 30 years) when the premium will stay the same and the insured person is covered. After that period of time has ended, the plan ends. The policy holder can choose to renew their plan (if eligible), but their premium will likely change.
- Permanent life insurance (meant to insure an individual continuously until their death) tends to be more complicated and expensive. However, it involves a cash value element. Cash value can be accrued by permanent life insurance policies through earning components (similar to bonds, CDs, or mutual funds), which vary depending on the type of permanent life insurance. Whole, universal, and variable are all types of permanent life insurance policies.
Where Can I Get More Life Insurance Information?
If you want to get more life insurance information on your own, visit our online resource center. It’s a good place to continue your personal research into your life insurance options. On the other hand, if you want someone to talk to—one on one—about life insurance, consider talking to a licensed agent. He or she can help you evaluate your needs, walk you through your coverage options, and even help you find a plan that suits your budget. You can find a local agent online or by calling (800) 917-4169.