Is it as simple as person x gives money to some company to be spent a certain way after person x dies? How is that any different from a will? etc..
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Life insurance is for people who have other people dependent on them like a spouse and children. You name your beneficiaries and buy a plan where you pay regularly to the life insurance company and in the event of your death, the beneficiaries will receive money to take care of themselves. It’s different from a will because a will is a plan to give things you already own to other people whereas life insurance is to insure that your dependents get additional money from the insurer.
I pay $150 a month. If I die, my spouse gets $3 million. That’s life insurance.
Life insurance works because the life insurance company takes the money, invests it, and makes their money over the period they expect you to keep living.
It’s a complex risk calculation, as you become higher risk you pay more.
Life insurance is like any other insurance policy. You pay premiums with the understanding that when you die, the named beneficiary on the policy will get a payout. The money can be spent however the beneficiary chooses but it’s not uncommon for at least some of it to be used to settle debts the deceased left behind like unpaid credit cards, mortgages, etc.
A will is a legal document you create before you die that states who gets your belongings, money and other articles of your estate after your death. They may stipulate who gets what and how much goes to each party named in the will. They might also have conditions about how assets are distributed like waiting until children reach adulthood before getting their inheritance.
Life insurance is a hedge against the policy holder’s death. For instance, let’s say you have a family of 4, with only one parent working. If that parent dies, then they’d be out of luck. So the family takes out a life insurance policy, paying the insurer a small fee periodically. In the event of the policyholder’s death, the insurer pays out some large sum of money as negotiated when the policy was bought. The policy can also be used to settle expenses and debts of the deceased, like paying for the funeral.
Insurance is an agreement where you pay you the insurer a little money called a premium in case something bad happens to you. If the bad thing does happen then the insurer will pay you a lot of money as compensation. Sometimes the premium is paid upfront at the start, sometimes it is paid regularly like once a month. An insurer has two sources of income: premiums and the interest on investments it makes using the premiums. It has two sources of expenditure: compensation payouts and running costs. The insurer hopes the bad thing is unlikely to happen, so that it collects premiums from lots of people and pays compensation to only a few.
In life insurance the bad thing is you die. The compensation goes to someone close to you, typically your spouse. Sometimes the agreement is for a fixed time — maybe the term of your house mortgage, so if you die your spouse isn’t homeless. Sometimes the agreement ends when you die — called whole-life insurance. In whole-life insurance you might think the insurer has a bad deal since they will definitely have to pay out eventually. The way they respond to that is (1) premiums are higher than for fixed-term insurance and (2) the average whole-life policy runs for decades, so it earns a lot of interest.
Insurance is just protection in case something bad happens. I don’t want to get into a car accident and the insurance company doesn’t want me to get into a car accident either. I pay the insurance company for their coverage, and if I dont get into a car accident, they get to keep that money. If I do get into a car accident, then they pay me money so I can repair or replace my car. Life insurance is the same concept, except they pay out when I die. As long as I am still alive, I am paying more money to the insurance company until I eventually do die, but I still pay out the same amount. If you do something to intentionally trigger the insurance payout, then that’s insurance fraud, and thats a crime.
All insurance is designed to offset a *loss*. If my house burns down the insurance replaces my house. If my car crashes insurance gets me another car. What you do with the money is up to you. If my car crashes I don’t *have* to spend the money on a new car, I can just pocket the amount and take the bus. It’s just an agreement give me $X if my *thing* is lost.
Life insurance exists to cover the *loss* of the benefit of the earnings of the deceased.
For example, say I’m the sole breadwinner in my home, I have a spouse and 2 children. My future earnings are going to cover things like paying off my mortgage, getting my kids through college, paying for their weddings etc.
So I’m 30 I probably want a lot of insurance to cover those events (all the years of earnings I’m not getting).
If I’m 80 I probably don’t need much/any insurance because what I’m paying for? The house is paid off, the kids are through school, married, have their own problems, etc.
It’s death insurance.
When you die, your beneficiary gets x number of dollars.
That can be used to clear debts, burial expenses or whatever you and your beneficiary have discussed.
Almost, but different. You pay premiums, but the amount the company pays out is usually a lot more than the premiums. However, the premiums are calculated based on how old you are and how healthy you are. If you are quite old, your premiums will be very high because they want to get as much money from you every month as they can and if you are very old, you may not live that long so they’ll have to pay out more than you put in. If you are younger the premiums are less because you are usually healthier and have longer to live…however you might also do riskier things.
Usually, life insurance is part of your employment benefits. You still pay some, but your company kicks in a lot too. So if you die, your family will be paid something like twice the amount of your yearly salary.
So it’s not just like putting money into a bank and then if you die the money in the bank is spent on something.
A life insurance policy is a bet between you and the insurance company. You are betting them you are going to die and they are betting you that you are not.
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