Life insurance policies are contracts between you and an insurance company, much like annuities.
What’s included in that contract? Believe it or not, it’s not all that complex. You agree to make payments, aka premiums, to the insurance company. Often, this is for a specified period of time, even the duration of your life. In exchange, the insurance company will give out a lump-sum cash payout when you pass away. Also known as a “death benefit,” this is within the duration of the policy. Furthermore, this contract is legally binding. And, it’s also regulated by the government.
If you were to pass away while the policy is in effect, the beneficiary of your life insurance policy would usually receive a tax-free payout (death benefit), depending on the policy.