Life insurance is a contract between an insurance policyholder and an insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the death of the insured person. In exchange for this financial protection, the policyholder pays regular premiums to the insurance company.
There are several types of life insurance policies, but they generally fall into two categories: term life insurance and permanent life insurance.
Term Life Insurance: Term life insurance provides coverage for a specified period, typically ranging from 10 to 30 years. If the insured person dies during the term of the policy, the insurer pays out a death benefit to the beneficiary. Term life insurance policies do not accumulate cash value and are usually more affordable than permanent life insurance.
Permanent Life Insurance: Permanent life insurance provides coverage for the entire lifetime of the insured person, as long as premiums are paid. It includes several subtypes, including whole life insurance, universal life insurance, and variable life insurance. Permanent life insurance policies typically have a cash value component that grows over time, allowing policyholders to access funds through loans or withdrawals while they are still alive.
Life insurance serves several purposes, including:
- Income Replacement: Life insurance proceeds can provide financial support to surviving family members, replacing the income of the insured person and helping them maintain their standard of living.
- Debt Repayment: Life insurance can be used to pay off outstanding debts such as mortgages, loans, or credit card balances, ensuring that the insured person's loved ones are not burdened by financial obligations after their death.
- Estate Planning: Life insurance can be used as part of an estate plan to provide liquidity for estate taxes, inheritance equalization, or charitable bequests.
- Business Continuity: Life insurance can be essential for business owners to protect their businesses from financial losses in the event of their death. It can fund buy-sell agreements, key person insurance, or business succession plans.
Life insurance is an important financial tool that helps individuals and families protect against the financial consequences of death and plan for their future financial security.