Life Insurance

Definition

Life insurance is a financial product that provides a monetary benefit to a designated beneficiary upon the death of the insured person. It acts as a safety net for loved ones, ensuring they have financial support during difficult times, and can be an essential part of adapting financial strategies to life changes such as marriage, parenthood, or retirement.

5 Must Know Facts For Your Next Test

1. Life insurance can help cover outstanding debts, such as mortgages or personal loans, ensuring that these financial burdens do not fall on family members after one's passing.
2. There are two main types of life insurance: term life insurance, which covers a specific period, and whole life insurance, which provides lifelong coverage and includes an investment component.
3. Life insurance policies can be tailored to individual needs based on age, health status, and financial responsibilities, making it a versatile tool for financial planning.
4. Many life insurance policies can also accumulate cash value over time, which policyholders can borrow against if needed while they are still alive.
5. Reviewing and updating life insurance coverage is essential after significant life events, such as marriage, having children, or changing jobs, to ensure adequate protection for loved ones.

Review Questions

• How does life insurance function as a financial safety net for families during major life changes?
  • Life insurance functions as a financial safety net by providing a monetary benefit to the beneficiaries upon the death of the insured. This benefit can help cover living expenses, debts, and future financial goals for family members left behind. During major life changes such as marriage or parenthood, having a life insurance policy ensures that loved ones are financially supported even in unexpected situations.
• Discuss the differences between term life insurance and whole life insurance in terms of their benefits and costs.
  • Term life insurance provides coverage for a specific time period and is typically more affordable than whole life insurance. It pays out only if the insured dies during that term. On the other hand, whole life insurance offers lifelong coverage and includes an investment component that accumulates cash value over time. While whole life is more expensive due to its lifetime coverage and savings feature, it can be beneficial for long-term financial planning.
• Evaluate the importance of regularly reviewing and adjusting life insurance policies in relation to changing personal circumstances.
  • Regularly reviewing and adjusting life insurance policies is crucial as personal circumstances evolve, such as changes in marital status, the birth of children, or significant financial shifts. These adjustments ensure that coverage remains adequate and relevant to current needs. Without regular updates, individuals risk leaving their beneficiaries underinsured or overinsured, impacting financial security when it is needed most.

Related terms

Beneficiary: The person or entity designated to receive the death benefit from a life insurance policy when the insured passes away.

Premium: The amount of money paid periodically to maintain an active life insurance policy.

Term Life Insurance: A type of life insurance that provides coverage for a specified period, typically ranging from 10 to 30 years, and pays out only if the insured dies during that term.