Life insurance is a contract between you and an insurance company. As with other insurance products, life insurance is designed to manage risk. In this case, offering financial security to your loved ones.
Life insurance policies consist of four basic components:
- Policyholder. Owner of the life insurance policy and who also pays premiums. The applicant and policyholder are usually the same people, but you’re allowed to purchase a policy on others’ behalf.
- Beneficiary. In the event of the death of the policyholder, the individual(s) or business entity(ies) who will receive the death benefit. When you purchase a policy, you can name one (or more) persons as beneficiaries.
- Premium. Monthly or yearly payments that are paid to maintain an active policy (or to keep it “in-force”). Upon your death, a premium ensures your beneficiaries will receive the outlined benefit from the insurance company. The policy lapses if you stop paying premiums.
- Death benefit. In the event of the insured’s death, the insurer will pay out the death benefit. Beneficiaries of death benefits are generally paid a lump-sum amount and are not taxed.