Life Insurance - An Overview
At its core, life insurance is a simple concept. Essentially, it is a means of providing for those who are left behind in the event of a wage-earner's death. Life insurance proceeds are tax-free to beneficiaries and so it also plays a role in estate-planning, wealth accumulation, wealth-accumulation and wealth-transfer.
While life insurance is conceptually straightforward, in practice, things are slightly more complicated. There are many kinds of life insurance products on the market today and each has their own sets of benefits and drawbacks. As with any financial services product, do your research before you buy and it never hurts to get expert advice.
This site will provide an overview of the broad categories of insurance available today. It is not intended to be a comprehensive guide but rather to give you a broad understanding of the life insurance landscape.
Life Insurance - Definitions
Before we get into a discussion of the various kinds of life insurance, there are two terms we need to define:
- Death-Benefit: This is the dollar amount paid out to the policy beneficiaries upon the policy-holder's death.
- Cash-Value: This is the dollar amount that is paid out to the policy holder in the event that the policy is dissolved before the policy holder dies.
The value of a policy is determined by the amounts of the death benefit and the cash value. How these values are computed and paid out form the basis of the differences between the various types of life insurance instruments available. Typically, the death benefit is the face value of the policy. If you buy $1 million in life insurance, that amount is the death benefit that will be paid out. If there is any cash value associated with the policy, then it accumulates over time as you pay in premiums.