Life Insurance 101 - The Basics

In the simplest sense, life insurance is something that pays a death benefit to a beneficiary when you die. Life Insurance's primary purpose is to protect against the risk of you dying too soon. Your premature death would expose your family or business to certain financial risks, such as burial expenses, paying off debts, loss of family income and loss of business profits, etc.

Since the face amount of the policy is payable upon the death of the insured person, the element of risk to the insurance company is much different than it is for say, an automobile policy. When an insurance company issues an auto policy, it hopes you will be a safe driver and will never have an accident, so you will never file a claim. When an insurance company issues a "permanent" life insurance policy, it knows it will be called upon to pay a claim someday since every human being dies sooner or later. For the insurance company, the only unknown is whether the claim will be made in the first year or in a number of years in the future.

None of us can be certain that we will live for a long time, even if our ancestors are long-lived. There is always the possibility that a disease or accident will result in a premature death. Anyone can become a victim of a natural disaster or an act of violence.

Death benefits are the one thing that all types of life insurance have in common. If it doesn't pay a death benefit, it isn't life insurance. The death benefit is the pure life insurance protection portion of a policy. The product gets its name from the fact that a life is being insured and it is the loss of life that triggers payment of the benefit. Death benefits represent the true insurance element, the pure protection aspect, of all life insurance policies.

In addition to death benefits, many life insurance policies include other features, such as savings or investments. These non-life insurance benefits may be included in a policy or they may be attached as optional riders. They make it possible to use life insurance as a vehicle for building capital for accumulating assets or funds designed to serve specific purposes. Thus, some people use life insurance to accumulate funds for children's education, to provide retirement income, to create or add to an estate and for other purposes.

The death of an insured person creates an instant estate for the benefit of the individual's family. From a personal perspective, life insurance may be used to provide peace of mind and financial security for a family.


Source: Florida School of Insurance


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