Understanding Life Insurance: Key Components A life insurance policy consists of three primary elements.

• Death benefit: This is the sum of money the insurance company promises to pay the beneficiaries named in the policy when the insured person passes away. The insured selects the desired death benefit amount based on the anticipated future needs of their surviving dependents. The insurance company evaluates insurable interest and determines if the insured is eligible for coverage according to the company’s underwriting criteria.
• Premium payments: These are calculated using actuarial data and statistics. The insurer identifies the cost of insurance (COI), which covers mortality costs, administrative fees, and other policy maintenance expenses. Factors affecting the premium include the insured’s age, medical history, occupation-related risks, and personal risk propensity. As long as the required premiums are paid, the insurer remains obligated to provide the death benefit. In term policies, the premium comprises the COI, whereas, in permanent or universal policies, it consists of both the COI and a cash value component.
• Cash value: This feature is unique to permanent or universal life insurance policies and serves two functions. First, it acts as a savings account for the policyholder, accumulating cash on a tax-deferred basis during the insured’s lifetime. Some policies may impose restrictions on withdrawals depending on the intended use of the withdrawn funds. Second, the cash value helps offset the increasing cost of insurance or provides coverage as the insured person gets older.