Life insurance is a contract between an individual and an insurance company. In exchange for regular payments, called premiums, the insurance company will provide a sum of money, known as a death benefit, to the beneficiaries designated by the policyholder upon the policyholder’s death.
Life insurance is designed to provide financial security to the loved ones of the insured individual after their death. When a life insurance policyholder passes away, their beneficiaries will receive a death benefit. This payout can be used to cover a variety of expenses, such as:
Essentially, life insurance helps to replace the financial support that the insured individual would have provided if they were still alive.
There are two primary categories of life insurance: term life insurance and permanent life insurance.
Term life insurance is generally the more affordable option and provides coverage for a predetermined period, typically 10, 20, or 30 years. If the insured individual passes away during this term, the death benefit is paid to the beneficiaries. However, if the insured person outlives the policy’s term, the coverage simply expires, and no payout is made. This type of insurance is often favored for its affordability and straightforward coverage.
Unlike term life insurance, permanent life insurance, as its name suggests, offers lifelong coverage. As long as the premiums are consistently paid, the death benefit is guaranteed to be paid out whenever the insured individual passes away. Permanent life insurance policies also typically include a cash value component, which grows over time and can be borrowed against or withdrawn by the policyholder while they are still alive. However, it’s important to note that permanent life insurance tends to be more expensive than term life insurance.
There are various types of permanent life insurance, including whole life insurance, universal life insurance, and variable life insurance. Each of these types has its own set of features, benefits, and drawbacks.
When you purchase a life insurance policy, you get to decide who will receive the death benefit. This person or entity is called your beneficiary. You can name anyone as your beneficiary, but they must have an “insurable interest” in your life. This means that they would experience a financial loss if you were to die. Common choices for beneficiaries include spouses, children, domestic partners, friends, or even charitable organizations.
When the time comes for your beneficiaries to receive the death benefit, they have several payout options, depending on the insurance company and the specific policy. The most common options include:
Understanding the different payout options can help you and your beneficiaries make informed decisions about how the death benefit will be managed.
