Life InsuranceFinancial Dictionary -> General Finance -> Life Insurance
Like most insurance policies life insurance is hedging the risk of some monetary loss, in this case should the policy holder die and not be able to support their family. The policy holder is required to pay monthly payments in to the policy, and if they die a lump sum is paid out. The logic behind this is that the small losses of paying a monthly fee is better than the potential big loss should death occur.
The amount a policy holder must pay for life insurance depends on the insurer and their assessment of risk. Should they determine that the policy holder is highly likely to pass away in the next few years, premiums will be sky high, or they may not be able to obtain a policy at all. This is usually the case with people who already have a life threatening illness. The insurer is banking that the majority of the life insurance holders do not die prematurely, and thus they receive enough money for a profit. It may also be more costly for those that work dangerous jobs, such as an ice road trucker, compared to an office worker. Age and general health are also often taken in to consideration before terms are agreed.
Interestingly not all life insurance plans require the holder to die before a payout. Subject to terms, some can be cashed out before death.