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Life Insurance can be viewed as a binding contract between a policyholder, probably you, and an insurance company. The resulting policy thereof guarantees that your family is shielded from undue hardship in case of your death, thereby making available money to satisfy any income loss, taxes and consumer debt. The three major parts of the life insurance agreement are a premium payment, a death benefit and a cash value account, in the case of permanent life insurance.
The insurance company estimates the amount of premium it needs to cover mortality costs by applying a computer calculator based statistics. The main risk factors in determining the premium include the policyholder’s personal and family medical history, age and lifestyle. As long as the policyholder pays the premium as stated in the binding agreement, the insurance company stays committed to pay the death benefits. In case of term life contracts, the cost of insurance is included into the premium amount. For the permanent insurance contracts, the premium amount includes the cost of insurance and the amount is deposited to a cash value account.
The amount of money the beneficiaries receive upon the death of the policyholder is the death benefit. Even though the death amount is determined by policyholder, the insurance company will have to determine if there is an insurable interest and whether the policyholder can qualify for the coverage based on the insurance company’s underwriting prerequisites.
Cash value which is an aspect of permanent life insurance has two functions. It is a savings account that permits the policyholder to pile up capital that become a living benefit. The capital piles up on tax-deferred basis and can be utilized for other reasons while the policyholder is alive. The insurance company uses to lower it’s risk. As the cash value piles up, the amount for the insurance company that is at risk for the entire death benefit.
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