A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurer provides a death benefit to the policy's beneficiaries when the insured person dies. The policyholder is the person who owns the life insurance policy, and the insured is the person whose life is covered by the policy.
Premiums are usually paid monthly, but can also be paid annually or as a lump sum. The death benefit is generally paid out as a lump sum, but some policies offer the option of an annuity, which pays out the death benefit over time.
Most life insurance policies have a face value, which is the amount that will be paid out to the beneficiaries upon the policyholder's death. The policyholder can choose to have the death benefit paid out in a lump sum, or they can choose to have the death benefit paid out in installments (usually over a period of 10 years).
Some life insurance policies also have a cash value, which is the amount of money that the policyholder can borrow against the policy. The cash value grows tax-deferred, and the policyholder can use the cash value to pay premiums, or they can take out a loan against the cash value.
Life insurance policy loans are not taxed, as long as the loan does not exceed the policy's cash value.
If the policyholder dies before the loan is repaid, the death benefit will be used to repay the loan.
Life insurance policies can be either whole life or term life.
Whole life insurance policies have a face value and a cash value, and they remain in force for the policyholder's entire life.
Term life insurance policies have a face value and do not have a cash value. They are in force for a set period of time, such as 10 years, 20 years, or until the policyholder reaches a certain age, such as 65.
If the policyholder dies during the term of the policy, the death benefit will be paid out to the beneficiaries. If the policyholder does not die during the term, the policy will expire and there will be no death benefit paid out.
Both whole life and term life insurance policies have different types of riders that can be added to the policy. Riders are additional features that can be added to a life insurance policy for an additional cost. Some of the more common riders are accidental death and dismemberment, disability income, long-term care, and critical illness.
Whole life and term life insurance policies are both valid forms of life insurance. It is important to understand how each type of policy works before deciding which one is right for you.