What is Life Insurance?

A life insurance policy is a binding contract between a policy owner and an insurance company. The company promises to pay a specified amount of money (The Death Benefit) to the Beneficiaries named in the policy upon death of the Insured person named in the policy. The Policy Owner is often the same as the Insured, but not in all cases. For example, it is common for adult children to own life insurance policies on their parents. Businesses often own policies on key employees, and couples often own policies on each other. A life insurance policy assures that a desired amount of liquid capital is available upon the insured’s death. In special circumstances, some life insurance policies also provide some funds during the insured’s lifetime, usually referred to as living benefits. Personal life insurance is most commonly used for one of two circumstances: 1. to replace lost income to survivors in the event of an untimely death, and 2. to provide liquidity to an estate to allow an orderly transfer of capital assets like real estate and stock from one generation to another within a family. As a general rule of thumb, term life insurance policies are designed to be available as income replacement for an untimely death, and permanent policies are designed to be available for estate planning no matter how long you live. When evaluating life insurance policies for suitability, the most important step is to determine what needs the family is trying to meet, and then identify the type of insurance policy designed to meet that goal. Check out our article Life Insurance Designed for Your Family for a discussion how to determine which is the right fit for your family.

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