Insurance Guide Blog

A life insurance policy is a legal agreement between an insurance agency and the policyholder, according to which the insurance agency agrees to pay a predetermined amount of money to a person or to a group of people, such as the insured’s family, upon the death of the policyholder. Those who receive this money are called the beneficiaries of the life insurance policy. Most policies also state that the insured person, rather than the beneficiaries, becomes eligible to receive these funds if he or she lives to be a certain age, often 90, 95, or 100. In return for these benefits, the policyholder pays a fee called an insurance premium. Most policyholders pay this fee annually. Many people receive life insurance as part of the benefit package (the terms of employment contract including insurance coverage and other benefits) associated with their jobs.

For example, a life insurance policy identifies the policyholder’s wife as the beneficiary scheduled to receive $200,000 in the event of the policyholder’s death. The policyholder is required to pay a $90 premium annually. If the policyholder dies three years after buying the policy (having paid only $270), the insurance company will pay his wife $200,000. Assuming this is one of the most basic types of policies, the insurance company would be required to pay the same fee of $200,000 if the policyholder died 20 years after buying the policy, having paid a total of $18,000 in premiums to the insurance company. The policy also states that if the policyholder lives to be 95 years old, he will collect the $200,000. Over the life of the policy, the policyholder is free to change beneficiaries or to add beneficiaries to the policy. If the policyholder’s wife were to die before he did, he would be able to name one of his children as the new beneficiary. If the policyholder wishes to add a child to the policy, he is required to stipulate how the $200,000 should be divided among the beneficiaries.