Life insurance

A life insurance policy provides that the insurance company will pay a certain amount of money when the person insured dies. The amount of money is called the face value or death benefit of the policy. It is paid in a lump sum or in installments to the beneficiary, the person or persons named by the policyholder to receive the death benefit. Most policyholders insure themselves or members of their family. But a person may insure the life of a nonrelative if the nonrelative permits it.

Wage earners buy life insurance chiefly to replace income that would be lost to their families if they died. Money from an insurance policy can help support a wage earner's children until they are old enough to support themselves, and it can provide funds for their education. It can also help provide an income for a surviving spouse. Money from the death benefit can be used to pay the deceased's mortgage, medical bills, funeral expenses, and other debts. It may also be used to pay estate and inheritance taxes.

Businesses often buy life insurance to cover key employees and to provide money to continue the business if a partner dies. Many life insurance policies have a living benefits provision, which allows policyholders who are terminally ill or confined to a nursing home to receive benefits before they die.

Some types of life insurance policies also enable policyholders to save money. Such policies have a cash value. A policyholder may borrow money against the cash value or surrender (turn in) the policy for its cash value. Any amount borrowed against the cash value, plus interest, is subtracted from the face value if the insured person dies before the loan is repaid. Some policies have a double indemnity clause. It provides a payment of two to three times the face value of the policy if the insured person dies as the result of an accident.

Main kinds of life insurance. There are three main kinds of life insurance: (1) term life insurance, (2) whole life insurance, and (3) universal and variable life insurance.