What is Life Insurance and How Does it Work?
Life insurance is a contract between an individual and an insurance company in which the policyholder pays regular premiums in exchange for a guaranteed payout in the event of their death. This payout, known as the death benefit, can help provide financial stability for the policyholder’s loved ones after they pass away.
Types of Life Insurance
There are two main types of life insurance: term life insurance and permanent life insurance.
Term Life Insurance
Term life insurance is temporary coverage that offers a guaranteed payout if the policyholder dies during the term. The term is typically 5, 10, 15, 20 or 30 years, and the premiums are usually level, annual renewable, or decreasing. [1].
Permanent Life Insurance
Permanent life insurance typically lasts a lifetime and provides coverage that lasts as long as the policyholder is alive. It also builds up cash value over time that can be used by the policyholder during their lifetime. [4].
Why Buy Life Insurance?
The purpose of life insurance is to provide peace of mind for the policyholder and their loved ones. If the policyholder dies, the death benefit from their life insurance policy can help provide financial stability for their loved ones. [2].
Determining Life Insurance Premiums
Life insurance premiums are primarily based on the policyholder’s life expectancy. In general, younger and healthier individuals will have lower premiums, while older and less healthy individuals will have higher premiums. Insurance companies use terms like “non-smoker” and “standard risk” to classify applicants and determine their premium amounts. [3].
How Much Life Insurance is Needed?
The amount of life insurance a person needs depends on various factors, including their personal and household income, the needs of their dependents, and the amount of debt they have. [5].
In conclusion, life insurance is a contract between an individual and an insurance company in which the policyholder pays regular premiums in exchange for a guaranteed payout in the event of their death. There are two main types of life insurance: term life insurance and permanent life insurance. The amount of life insurance a person needs depends on various factors, including their personal and household income, the needs of their dependents, and the amount of debt they have.
