- What is life insurance, and how does it work? Answer: Life insurance is a contract between an individual (the policyholder) and an insurance company. The policyholder pays regular premiums to the insurer, and in return, the insurer promises to pay a death benefit to the designated beneficiaries upon the death of the insured person. This benefit provides financial protection to the insured’s loved ones.
- What is a premium in life insurance, and how is it determined? Answer: A premium is the amount of money the policyholder pays to the insurance company to maintain coverage. Premiums can be paid monthly, annually, or in other intervals. The cost of premiums is determined by factors such as the insured person’s age, health, lifestyle, occupation, and the type and amount of coverage.
- What is a death benefit, and how is it paid out? Answer: The death benefit is the amount of money that the insurance company pays to the beneficiaries upon the death of the insured person. It is typically paid out in a lump sum, although some policies may offer other payout options such as periodic installments. The death benefit is generally income tax-free for the beneficiaries.
- What is the difference between term life and whole life insurance? Answer: Term life insurance provides coverage for a specific period (e.g., 10, 20, or 30 years) and pays a death benefit if the insured dies within that term. Whole life insurance offers coverage for the insured’s entire life and includes a cash value component that grows over time. Whole life policies also have fixed premiums.
- What is the cash value of a life insurance policy, and how does it work? Answer: The cash value is a feature of permanent life insurance policies like whole life and universal life. It represents the savings component of the policy, which accumulates over time as premiums are paid and earns interest on a tax-deferred basis. Policyholders can borrow against the cash value or surrender the policy for its cash value.
| Term | Definition |
|---|---|
| Premium | The amount paid by the policyholder to the insurance company for coverage |
| Death Benefit | The amount paid to beneficiaries upon the death of the insured person |
| Beneficiary | The person or entity designated to receive the death benefit |
| Term Life Insurance | Provides coverage for a specific period, with no cash value component |
| Whole Life Insurance | Offers lifelong coverage and includes a cash value component |
| Cash Value | The savings component of permanent life insurance policies |
| Surrender Value | The amount paid if the policy is surrendered before maturity |
| Policyholder | The person who owns the life insurance policy |
| Underwriting | The process of evaluating an applicant’s risk profile for insurance |
| Rider | An optional add-on to a life insurance policy that provides extra benefits |
