Life insurance basics: In a nutshell, the purpose of life insurance is to pay a sum of money to one or more people (called beneficiaries) when another person (the insured person) dies. Consider a typical household consisting of a married couple and two children. The man might choose to take out a policy on himself for $1 million. He makes regular payments (called premiums) to keep the policy in force. In exchange, when/if he dies, his wife and children collect the $1 million. The $1 million in this case is known as the death benefit.
Life insurance serves many purposes, from as small and simple as paying for funeral expenses to providing a stream of income for the beneficiaries after the death of the insured. In addition to being used to protect families, businesses also use life insurance to protect their financial interests.
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In some cases, life insurance is used as a source of funds during the insured’s lifetime. How does this work? Some life insurance policies grow in value as the premiums are paid. The growth typically occurs because a portion of the premium is set aside and earns interest. This extra cash is known as the cash value of the policy and is available for the insured to use for a variety of purposes. The ability to use these funds prior to the death of the insured is known as a living benefit.
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Some common uses of living benefits are college expenses, a financial emergency, or large medical expenses.
Life Insurance Basics
