What is life insurance and how does it work?

Life insurance is a contract: you pay premiums, and the carrier pays a tax-free lump sum (the death benefit) to your named beneficiaries when you die. You can name a primary beneficiary (first to receive funds) and a contingent beneficiary (receives funds if the primary has predeceased you). Death benefits are paid on virtually all causes of death; standard exclusions are death by suicide within the first two policy years and death linked to material misrepresentation in the application (e.g., concealed health conditions or hazardous activities). Beneficiaries can take payment as a single lump sum (entirely tax-free) or as installments (principal tax-free, interest taxable).