What is a life insurance policy, and what are its key features?
A life insurance policy is an agreement between an insurance company and a person (or legal entity). Each life insurance policy is different, and each state’s laws regulating insurance policies are different. In general, most insurance policies identify the following:
- The insurer: Only certain companies can provide life insurance, and these companies are regulated by state insurance departments.
- The policyholder: The person or entity (such as a family trust or a business) which owns (or “holds”) the policy. The policy can insure the holder, or it can insure another person.
- The insured: The person whose life is insured.
- The death benefit: The amount the insurer will pay when the insured passes away.
- The beneficiaries: The people or entities that will receive the death benefit. It can all go to a single person (e.g., a surviving spouse) or it can be divided by percentage among many different people and entities (e.g., three children could each get 30% and 10% could go to a charity).
- The policy length: The time period that the insurer agrees to pay a death benefit. This can be a specific term (e.g., 10 or 20 years) or it can be permanent – a policy that lasts for the life of the insured for as long as premiums are paid.
- The premium: The monthly or yearly payments needed to keep the policy in effect.
- The cash value: Permanent life policies, like whole life insurance, have a cash value component that builds over time2 and can be cashed out or borrowed against.3 A term policy has no cash value.