A life insurance policy has two main components: a death benefit and a premium. Term life insurance has these two components, but permanent or whole life insurance policies also have a cash value component.

1. Death Benefit—The death benefit, or face amount, is the amount of money the insurance company guarantees to the beneficiaries identified in the policy when the insured person dies.
   The insured person might be a parent and the beneficiaries their children, for example. The insured person chooses the desired death benefit amount based on the beneficiaries' estimated future needs. The insurance company determines whether an insurable interest exists and whether the proposed insured qualifies for coverage under the company's underwriting requirements relating to age, health, and any hazardous activities in which the proposed insured participates.
2. Premium—Premiums are the money the policyholder pays for insurance.
   The insurer must pay the death benefit when the insured person dies if the policyholder pays the premiums as required. Premiums are determined partly by the likelihood that the insurer will have to pay the policy's death benefit based on the insured person's life expectancy. Factors affecting life expectancy include the insured person's age, sex, medical history, occupational risks, and high-risk hobbies. Part of the premium also goes toward the insurance company's operating expenses. Premiums are higher for policies with larger death benefits, higher-risk individuals, and permanent policies that accumulate cash value.
3. Cash Value—The cash value in permanent life insurance serves two purposes.
   It is a savings account that the insured person can use during their lifetime; the cash accumulates on a tax-deferred basis. Some policies may restrict withdrawals depending on how the money will be used. For example, the policyholder can take a loan against the policy's cash value and must pay interest on the loan principal. The policyholder can also use cash value to pay premiums or purchase additional insurance. Cash value is a living benefit that remains with the insurance company when the insured person dies. Any outstanding loans against the cash value reduce the policy's death benefit.

Tip: The policyholder and the insured person are usually the same individual, but they can sometimes be different. For example, a company might purchase key person insurance on a crucial employee, such as a chief executive, or an insured person might sell their own policy to a third party for cash in a life settlement.

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Many insurance companies offer policyholders the option to customize their policies to meet their needs.

Riders are the most common way policyholders can modify or change their plans. There are many types of riders, but availability depends on the provider. The policyholder generally pays an additional premium for each rider or a fee to exercise one, although some policies include certain riders in their base premium.

• The accidental death benefit rider provides additional life insurance coverage if the insured person's death is accidental.
• The waiver of premium rider excuses the insured person from making premium payments if they become disabled and cannot work.
• The disability income rider pays monthly income if the policyholder cannot work for several months or longer because of a serious illness or injury.
• Following a terminal illness diagnosis, the accelerated death benefit rider allows the insured person to collect some or all of the death benefit.
• The long-term care rider is a type of accelerated death benefit that can be used to pay for care in a nursing home, assisted living facility, or at home when the insured person needs help with activities of daily living, such as bathing, eating, and using the bathroom.
• A guaranteed insurability rider allows the policyholder to purchase additional insurance at a later date without a medical examination.

Borrowing Money: Most permanent life insurance accumulates cash value against which the policyholder can borrow. Technically, you are borrowing money from the insurance company and using your cash value as collateral. Unlike other types of loans, the policyholder's credit rating is not a factor. Repayment terms can be flexible, and loan interest goes back into the policyholder's cash value account. However, policy loans can reduce the policy's death benefit.

Every policy is unique to the insured person and insurer. It is important to review your policy document to understand what risks it covers, how much it will pay your beneficiaries, and under what circumstances.

Funding Retirement: Policies with a cash value or investment component can provide a source of retirement income. This opportunity may come with high fees and a lower death benefit, so it may be a good option only for people who have maximized other tax-advantaged savings and investment accounts. The pension maximization strategy described above is another way life insurance can fund retirement.

It is prudent to reassess your life insurance needs annually or after major life events, such as divorce, marriage, the birth or adoption of a child, or major purchases such as a home. You may need to update the policy's beneficiaries, increase your coverage, or even reduce it.