Life insurance is an insurance product that pays out a death benefit to your named beneficiaries in the event of your death. Each life insurance policy has a pre-determined death benefit and premium payment that accompanies it. When the named insured on the life insurance policy passes away, the death benefit is paid to his or her primary beneficiaries as long as they are still living, and paid to his or her contingent beneficiaries if the primaries are not.
Life insurance comes in the form of a permanent policy, which is one that is effective over the entire life of the insured (as long as premium payments are made on time) and accrues cash values that can be borrowed from while the person is still alive. Life insurance also comes in the form of a term policy, which is a type of life insurance policy that pays a death benefit if the insured’s death occurs during a certain time period — such as the next 15 years. Term policies do not accrue cash values and they are cancelled if death does not occur in the agreed upon time period.
Life insurance also has add-on benefits, called riders, which can add additional services and death benefits to your policy. In some cases, this means an accelerated benefit that allows the insured to take some of their death benefit out of the policy if they are diagnosed with a terminal illness. Other riders include the accidental death rider, which pays an additional death benefit if the insured is killed in an accident, and child or spouse riders, which provide death benefits upon the death of a covered child or spouse. It is important to remember that riders do add additional costs to the insured.
The next point in our proposed what is life insurance, is it worth the money question is whether or not life insurance is worth the money that policyholders put into it. With permanent policies, your premiums over a lifetime are not going to equal your death benefit, so your heirs are always going to benefit by receiving more in benefits than you paid in premiums. Some argue that it might be better to invest your premium dollars in bonds or the stock market and generate returns that way, but there is no guarantee that you will create returns—in fact, you may even lose money. In addition, you may need to pay capital gains taxes on the money you make when you invest money and your heirs may need to pay estate taxes on their inheritance — but life insurance death benefit proceeds are not subject to estate taxes and the cash value growth does not generally trigger a taxable event (it can if the life insurance policy is over-funded and cash values grow to equal the death benefit, though your insurance company will generally let you know how to avoid this).
One of the most cost effective forms of life insurance to buy is the term life insurance policy. Because it only covers you for a certain number of years, the insurance company takes on less risk when issuing it and, therefore, prices it cheaper. Additionally, because it doesn’t have any cash value accrual, the premiums consist of simply the cost of insurance alone. However, since the coverage is for a limited number of years, there is a chance that you may pay premiums but not actually get anything from your money, kind of like paying car or home insurance every year but never having a claim. Often, term policies are used for people to provide extra protection for their families while they still have mortgages and other debt.
In order to answer the main question posed—what is life insurance, is it worth the money — the answer is often this: Life insurance is financial protection for your family in the event of your death and it is almost always worth it, as long as you buy the right policy for you.