A life insurance policy is a legal contract between you and a life insurance company. As long as you pay the premiums, the life insurance company promises to pay money to your beneficiaries if you die.

A life insurance policy is a good way to provide funds for a family’s everyday expenses, pay a mortgage, or pay for children’s college if you die. It’s a way to make sure your family has a financial safety net if you’re no longer around.

Types of life insurance policies

One of the first steps in buying the right life insurance policy is choosing a policy that best matches your needs.

  • Term life insurance lasts for a specific period of time. If you die within that time frame, the policy pays out. It’s good for people who want life insurance to cover a specific debt (such as a mortgage) or a specific period of time (such as the years until retirement).
  • Whole life insurance lasts your entire life, so you know your beneficiaries will get the payout no matter how long you live. Premiums stay the same and the policy builds up cash value.
  • Universal life insurance comes in a few varieties. With some, you can vary your premium payments and death benefit within certain bounds. Some types build up cash value.

Life insurance policy glossary: 10 important terms to know

Beneficiary: The person(s) you name to receive the life insurance money. The life insurer can pay only the people you name because the policy is a legal contract. Consider naming both a primary beneficiary and a contingent beneficiary.

Cash value: The amount inside an account within the policy. You can withdraw or borrow this money. With some policies, cash value builds very slowly. Term life insurance does not have any cash value.

Death benefit: The amount a life insurance company pays to your beneficiaries.

Face amount: Usually the same as the “death benefit.” The amount the policy will pay out, such as $500,000. The face amount does not include cash value.

Insured person: The insured person on a life insurance policy is the one whose life is being insured. When the insured person dies, the policy pays out.

Lapse: if you stop paying for a policy, it will lapse, meaning coverage is no longer in force. In some cases you can reinstate a lapsed policy by paying the back premiums within a certain period of time.

Owner: A policy owner controls the policy and is the only one who can change beneficiaries and take out cash value. The policy owner is also the one legally responsible for paying for the policy.

Premium: The amount you’re supposed to pay for a policy. Premiums are often due every month or every year, depending on the payment plan you’ve chosen.

Rider: An extra to the policy that changes coverage, such as adding extra insurance for an accidental death.

Surrender: Life insurance policies with cash value can be surrendered, meaning the policy will end and you’ll get any cash value minus a surrender fee. This is called the surrender value.