How does life insurance work?
Life insurance is easy to understand once you know what questions you should be asking. If you understand the common components of an insurance policy, how to apply, the different types of policies, and the costs involved, you’ll know how to get the right coverage for your family.
What are common features of life insurance?
No matter what type of policy you buy, life insurance consists of these four components:
Policyholder The person who owns the life insurance policy. Typically, if the policyholder dies, the death benefit is paid out, but it’s possible to take out a policy on someone else.
Beneficiary The person, people or institution(s) that receive money if the policyholder dies. There can be more than one beneficiary named on the policy.
Premium The money paid monthly or annually to keep a policy active (or “in-force”). If you stop paying premiums, the policy lapses.
Death benefit The money paid out upon the event of the policyholder. Life insurance goes into effect as soon as you make your first premium payment, meaning you’re eligible for the death benefit as soon as the policy is in force.
Insurance companies always pay the death benefit, except in specific circumstances where they aren’t obligated to like:
- The policyholder outlives their term life policy
- The policy lapses or is canceled
- The death occurs within two years of the policy being in-force and the insurance company finds evidence of fraud on the application