What is Life Insurance?

Life insurance is a contract between a policyholder and an insurance company.
The policyholder agrees to make premium payments to the insurance company in exchange for the payment of a death benefit, if death occurs within the parameters of the contract.</ li>
This death benefit payment is paid to the chosen beneficiaries of the policyholder, typically children or spouses.

What are Premiums?

Life insurance transfers risk from the policyholder to the insurance company.
In return, the life insurance company charges a premium on the basis of the risk posed by the policyholder.
Premiums vary based on the risk of the policyholder and the size of the death benefit
The greater the death benefit, the greater the premium and vise versa.
Each policyholder has a unique risk profile, which is why premiums vary from one individual to another based on age, health, and habits.
Young and healthy people pay lower premiums because they are a lower risk whereas older people with illnesses pay higher premiums because they are a higher risk.

As the name implies, term life insurance is an insurance contract that lasts for a specific duration of time (term).
The insurance company pledges to pay a death benefit to the policyholder’s beneficiaries if the policyholder dies within the specified term.
Term life is cheaper than whole life insurance because there is less risk for the insurance company.
If the policyholder doesn’t die within the specified term, then the life insurance company doesn’t pay out the death benefit.

As the name implies, whole life insurance is an insurance contract that last for the remainder of the policyholder’s life.
It virtually guarantees the payment of a death benefit unless the death occurs through conditions that are expressly excluded in the contract.
Because the death benefit is guaranteed, whole premiums are higher than term life premiums.
Whole life insurance also can accrue a cash value at a fixed, agreed upon rate in addition to the death benefit.
For instance, certain whole life policies will grow 5% a year, so at death a whole life policy will pay the death benefit plus the cash value that has accrued at this rate.

Within life insurance contracts, there are certain conditions of death that exclude the insurance company from paying out a death benefit.
Examples of such conditions are natural disasters, suicide, or death that occurs as a result a crime.
If the policyholder dies in an excluded fashion, the insurance company will not pay the death benefit.

Policyholders have the option to add additional agreements called riders within a life insurance policy in exchange for additional premium.
For instance, a policyholder may decide to add a rider to their term policy that will pay them back a percentage of their premiums if they don’t die within the specified term in exchange higher premiums.
There are many different types of riders available to policyholders.