What is life insurance?
A life insurance policy is a financial safety net that provides your beneficiaries with a predetermined sum of money if you die during the policy term.
When you buy your life insurance policy, you appoint beneficiaries and set a payout. Beneficiaries can be anyone—from family members, close friends, and business partners to institutions like schools and museums. The payout, also known as the death benefit, refers to the amount of money your beneficiaries will receive.
Life insurance covers most causes of death, like illnesses and accidents. However, in some cases, like suicide within the first two years of a policy, or application fraud, your insurance provider may decline to pay the death benefit.
Your policy’s death benefit is typically given as a tax-free lump sum with no strings attached. This way, your beneficiaries can use it for whatever they need, from funeral expenses to mortgage payments to college tuition costs.
The payout amount you choose for your death benefit depends on your current financial obligations and the standard of living you want to give your loved ones after you have passed. To calculate the coverage amount, you need to add up all of your current and shared debts as well as the amount of money you want your beneficiaries to have for future expenses.
For example, if you have children who want to go to college and you plan to pay tuition, you will want to make sure your death benefit is large enough to cover that cost in your absence. If it doesn’t, your children might have to take out loans or forgo higher education.
While there are a few different types of life insurance —such as variable, universal, and term—the main idea is pretty simple: as long as you pay your life insurance premiums, your insurer will pay out the life insurance benefits to your designated beneficiaries if you die within the policy period.
Typically, you can pay your premiums monthly, twice a year, or annually. Paying the premium is very important; if you stop paying, you could lose coverage and be forced to reapply. Not only does that leave you uninsured, but it also means you’ll have to pay higher premiums.