eli5: What exactly is life insurance? How does it work?

Question

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..

In: 0

Answer 1

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.