What is a life insurance policy, and what are its key features?
A life insurance policy is an agreement between an insurance company and a person (or legal entity). Each life insurance policy is different, and each state’s laws regulating insurance policies are different. In general, most insurance policies identify the following:
The insurer: Only certain companies can provide life insurance, and these companies are regulated by state insurance departments.
The policyholder: The person or entity (such as a family trust or a business) which owns (or “holds”) the policy. The policy can insure the holder, or it can insure another person.
The insured: The person whose life is insured.
The death benefit: The amount the insurer will pay when the insured passes away.1
The beneficiaries: The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse) or it can be divided by percentage among many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).
The policy length: The time period that the insurer agrees to pay a death benefit. This can be a specific term (e.g., 10 or 20 years) or it can be permanent – a policy that lasts for the life of the insured for as long as premiums are paid.
The premium: The monthly or yearly payments needed to keep the policy in effect.
The cash value: Permanent life policies, like whole life insurance, have a cash value component that builds over time2 and can be cashed out or borrowed against.3 A term policy has no cash value.
There are a lot of misconceptions about What Life Insurance is and how it works. Many have questions like What types of coverage are there? How much coverage do I need? and many more. We are going to answer a lot of those later, but let us begin with the first question:
What is it?
In simple terms, life insurance is a contract that provided the worst happens, your family and those who you care about will be taken care of financially. Now that’s very broad, we need to understand how that process works.
How it works
A life insurance policy is between two parties. The policy owner and the Insurance Carrier. In exchange for monthly premiums insurance carrier will pay out a death benefit to whoever you designate as the beneficiary. The amount of premium the policy owner would pay is dependent on three factors. 1: The policy owner’s age, 2: Their current health condition, 3: The policy owner’s gender.
Why is it important?
This isn’t a subject a lot of people want to think about. But in all reality, this is a very important matter to keep in mind. Life insurance can help your family financially when the worst happens. How is that so? A recent study by Forbes showed that “On average a funeral can cost anywhere from $7,000 – $12,000”. A lot of times families may not have the means to cover that cost. Setting up a life insurance policy could help ensure that those costs would be taken care of without your family having to worry about the financial burden.
There is also the risk for families of losing the primary “breadwinner”. Not only are they having to mourn the loss of their loved one, but now they also have to figure out how they are going to pay bills, keep the house, and continue to live on without having to sell everything. That’s a lot of added stress that could be solved by setting up a Life Insurance policy. A policy could pay off the needed expenses for a family
In Conclusion
Life insurance comes in many types and forms, which leads to many questions. In this post we gave you the bird’s eye view, taking one step further into helping educate more people on Life Insurance. In the following weeks, we are going to cover more subjects surrounding Life Insurance. Topics such as Different types of life insurance coverage, How much coverage is needed? What are Beneficiaries and who can they be?
