What is Life Insurance

What is Life Insurance?

Life insurance is a protection against financial loss that would result from the premature death of an insured. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured. The death benefit is paid by a life insurer in consideration for premium payments made by the insured.

Cash Value:

Permanent life insurance includes a cash value component which serves two purposes. As the cash value accumulates, the amount the insurer is at risk for the entire death benefit decreases, which is how it is able to charge a fixed, level premium.

Death Benefit:

The death benefit is the amount of money the insured’s beneficiaries will receive from the insurer upon the death of the insured. The death benefit amount is determined by the insured, the insurer must determine whether there is an insurable interest and whether the insured can qualify for the coverage based on its underwriting requirements.

For term policies, the premium amount includes the cost of insurance. For permanent policies, the premium amount includes the cost of insurance plus an amount that is deposited into a cash value account.

Life insurance is a protection against financial loss that would result from the premature death of an insured. Before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your survivors or dependents. It is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.

How Life Insurance Works

Life insurance is a contract between an individual with an insurable interest and a life 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 the life insurance contract are a death benefit, a premium payment and, in the case of permanent life insurance, a cash value account.

BREAKING DOWN Life Insurance

The goal of life insurance is to provide a measure of financial security for your family after you gone. Before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your survivors or dependents. Will there be adequate funds for ongoing or future expenses such as daycare, mortgage payments, and college? It is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.

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