Define Life Insurance Policy
A life insurance policy is a legal contract between an insurance company and a policyholder. At the time of the policyholder's death, the insurance company agrees to pay the face amount of the policy, known as the death benefit, to an individual or individuals of the policyholder's choosing, known as the beneficiaries. In return, the policyholder makes regular payments for the policy to the insurance company in the form of premiums.
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Significance
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A life insurance policy provides a cash settlement to the policyholder's beneficiaries at the time of his death. Without life insurance, families could be left without the means to continue their same lifestyle due to the absence of the policyholder's income. Families could also be forced to sell assets to cover outstanding debts.
Time Frame
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Life insurance policies can last for the duration of the policyholder's life or for specified periods of time. Policies for specific time periods are often purchased for a specific purpose, such as to ensure that funds are available for a child's education in the event of the policyholder's death, or to pay off a mortgage balance or other debt.
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Types
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Types of life insurance include term insurance, which is typically purchased for predetermined time periods such as 10, 20 or 30 years. Term insurance is usually the least expensive and accumulates no cash value. Permanent life insurance often lasts throughout the insured's life and builds a cash fund that the policyholder may access in the form of a loan while the policy is in force.
Features
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Features of permanent life insurance policies will vary depending on the type of policy. Whole life policies accumulate a predetermined cash value over the life of the policy. Universal life policies also build cash, but the cash value is determined by an interest rate that can fluctuate but will never fall below a guaranteed level. Variable life policies build cash through investments such as stocks and mutual funds, so the death benefit and cash accumulation depends on how well the investments perform over time.
Benefits
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A major benefit of life insurance is that it gives the policyholder the peace of mind from knowing that her family will be provided for in the event of her premature death. Another important benefit is that life insurance proceeds are normally paid on a tax-free basis, so the beneficiaries will receive the full face amount of the policy minus the amount of any outstanding policy loans.
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References
- Photo Credit contract 20309 image by pablo from Fotolia.com
