Life insurance pays a death benefit when the insured person in the policy dies. The cause of death is not specific. This means that if you die in a car accident, the insurance policy will pay a claim. Make sure you understand how life insurance works before you buy a policy and watch for types of insurance that may only pay when you are in an accident.
There are two basic types of life insurance. First, there is term insurance. Term life insurance is temporary insurance. It lasts for only a set number of years. When the term is up, the insurance policy must be renewed or it is canceled. Permanent life insurance lasts for your entire life. The permanent policy provides a death benefit and a cash value savings which may be used for any purpose during your lifetime.
Life insurance pays a death benefit when you die. The cause of death need not be due to anything in particular. The policy contract for all life insurance policies simply specifies that you must die for your beneficiaries to make a claim. The only exception is that insurance policies include a two-year suicide clause. If death is the result of suicide within the first two years of the policy, the policy is void and all premiums are returned to the beneficiary, but no death claim is paid.
Do not confuse life insurance death benefits with accidental death benefits. An accidental death benefit is a form of insurance that pays a claim if your death is a result of an accident. The cause of death must be deemed to be an accident before the insurance policy pays a claim. If no accident occurs, then no death benefit claim is paid.
When you purchase a policy, consider your financial goals. Buy the type of policy that suits your needs best, but also make sure you can afford to pay for it over the long-term. A term life insurance policy will provide the coverage you need and the premiums are lower than a permanent policy, but the permanent policy will last for your entire life.
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007