What Is Life Insurance?

Understanding how life insurance works and how to shop for a policy can help you find the best coverage to meet your family's needs.

Life insurance is a contract between an insurance company and a policy owner in which the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. In exchange, the policyholder pays premiums to the insurer during their lifetime. The best life insurance company have good financial strength, a low number of customer complaints, high customer satisfaction, several policy types available, optional riders, and easy application processes.

Key Takeaways

• Life insurance is a legally binding contract that promises a death benefit to the policy owner when the insured person dies.

• The policyholder must pay a single premium upfront or pay regular premiums over time for the life insurance policy to remain in force.

• When the insured person dies, the policy’s named beneficiaries will receive the policy’s death benefit.

• Term life insurance policies expire after a certain number of years. Permanent life insurance policies remain active until the insured person dies, stops paying premiums, or surrenders the policy.

• A life insurance policy is only as good as the financial strength of the life insurance company that issues it.