Life insurance: Overview, definition, and example
What is life insurance?
Life insurance is a contract between an individual (the policyholder) and an insurance company, where the insurer agrees to pay a designated beneficiary a specified sum of money (the death benefit) upon the policyholder’s death. In exchange, the policyholder pays premiums regularly or as a lump sum. Life insurance provides financial protection and security for dependents or beneficiaries in the event of the policyholder’s death.
For example, a business owner might purchase a life insurance policy to ensure their family or business partners are financially supported if they pass away.
Why is life insurance important?
Life insurance is important because it offers peace of mind and financial stability to families, businesses, or dependents in the event of the policyholder’s death. For individuals, it can cover expenses such as mortgage payments, education costs, or daily living expenses for dependents.
For businesses, life insurance is often used in key-person policies or buy-sell agreements to ensure continuity and stability. It can also help pay off debts or cover operational costs in the absence of a critical employee or owner.
Understanding life insurance through an example
Imagine a parent purchases a life insurance policy for $500,000, naming their children as beneficiaries. If the parent passes away, the insurance company pays the $500,000 death benefit to the children, providing financial security for expenses such as education and living costs.
In another example, a business with two co-owners takes out a key-person life insurance policy for each owner. If one owner dies unexpectedly, the policy provides the surviving owner with funds to buy out the deceased owner’s share of the business, ensuring its continued operation.
An example of a life insurance clause
Here’s how a life insurance clause might appear in an agreement:
“The Company shall maintain a key-person life insurance policy on [Name of Employee or Owner] in the amount of [Insert Coverage Amount]. In the event of the insured’s death, the proceeds shall be used for [specific purposes, e.g., business continuity or debt repayment].”
Conclusion
Life insurance provides financial protection and stability for individuals, families, and businesses, ensuring that dependents or key stakeholders are supported in the event of an unexpected loss.
By incorporating life insurance into personal or business financial planning, individuals and organizations can mitigate risks, secure their future, and provide for those who depend on them.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.