What Is Life Insurance?

Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.

The life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities to enforce the contract.

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KEY TAKEAWAYS

  • Life insurance is a legally binding contract that pays a death benefit to the policy owner when the insured dies.
  • For a life insurance policy to remain in force, the policyholder must pay a single premium upfront or pay regular premiums over time.
  • When the insured dies, the policy’s named beneficiaries will receive the policy’s face value, or death benefit.
  • Term life insurance policies expire after a certain number of years. Permanent life insurance policies remain active until the insured dies, stops paying premiums, or surrenders the policy.
  • A life insurance policy is only as good as the financial strength of the company that issues it. State guaranty funds may pay claims if the issuer can’t.
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