What is Life Insurance?

Howdy Wall St. Willy! Sometime ago you told me about insurance and one of the kinds of insurance was life insurance. But what is life insurance anyway?

Well, life insurance is insurance that covers somebody’s life, which means that if they die, the life insurance company pays a certain amount of money to the person designated by them called the beneficiary.

Well who could be the beneficiary?

The beneficiary could be anyone but it’s usually someone from your family.

Well how much money is paid by the insurance company if we die?

It depends on the type of the insurance policy but that is decided at the time you buy the policy. This is called the death benefit.

Well what is policy anyway?

You get into a contract with the insurance company which contains many details like how much insurance premium you would pay, how frequently, how long the insurance is valid for, how much money would be paid out if you die and many more things.

Well, how long is life insurance valid for?

It depends on the kind of policy and how long you need the life insurance for. But it’s usually taken for 5 to 30 years.

Is there any money that is paid by the life insurance company if the life insurance policy holder does not die before the life insurance policy runs out?

It depends on the type of insurance policy but certain kinds of life insurance policies do not pay anything if the policy holder survives the term of the policy but some other kinds of life insurance policies pay out a certain amount in such a case.

Well who should but life insurance?

Anyone that has other people dependent on them financially. Because the idea behind life insurance is that if you die and your income stops, your dependents can use the money received from the life insurance company instead of your income so that they can still cover their financial needs.

How long should I buy life insurance for?

It depends on your financial situation and your dependents. You’d want the life insurance policy to last till your dependents, like you kids, become financially independent.

Also, if you have major debt like a mortgage, your life insurance policy should last till the mortgage is fully repaid.

Well, how much life insurance should I buy and what should be the death benefit?

Again, it depends on your financial situation. But it should generate enough money for your dependents to live on in case of your death and should be equal to or a little more than the amount on your mortgage or other major debt.

Are there different kinds of life insurance?

Yes, there are many different kinds of life insurance and some major ones are term life insurance, whole life insurance and universal life insurance. But discussing that in detail is a topic for another time.

Thank you very much for telling me about life insurance, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

Podcast: What is Life Insurance?

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