What Is Life Insurance?
In a simplest and most generic way to explain it, life insurance, also known as life assurance, is a guarantee that someone will receive certain amount of money when the policy holder dies.
In more official and technical terms Life Insurance is a contract between two parties with a third party (or parties) as beneficiary.
- The first party is the Insurance Company – Insurer
- The Second party is the Policy Holder – the person who’s life is insured
- The third party or parties is the Beneficiary – the designated person, persons or entity who will receive the benefit of the insurance policy when the policy holder dies.
In the most common terms the insurer promises to pay a certain sum of money to the designated beneficiary upon the death of the insured person.
However, depending on the conditions of the contract the policy may be triggered by other events such as Critical Illness or Terminal Illness before the policy holder has passed away and immediately after a medical diagnosis has been issued.
In return to that promise the insured person agrees to pay a specific amount of money at regular payments or in lump sums. This amount is called “The Premium”
Some policies include a specified sum of money that is paid upon the insured person is declared death. This sum is known as death or funeral expenses. It is worth making sure such expenses are included in the policy as burial services are becoming increasingly expensive and in some places the family is required to purchase the piece of land in the cemetery where the deceased will be buried.
The value the policy owner receives is intangible. It is in the way of the insured having a peace of mind that his family will be well looked after after he is gone and that his death will not cause a financial hardship to the people he loves.
Just like any other legal contract the life insurance policy stipulates the terms and conditions which limit the responsibilities of the insurer. Specific events causing the policy to be triggered are set as exclusions in order to limit the liability of the insurer. Some of the most common examples are suicide, fraud, war, riots and civil unrests.
There are two major categories of Life Insurance:
- Protection Policies – designed to typically provide a lump sum benefit in the occurrence of a specified event (death, critical and terminal illness) – most often used is term insurance.
- Investment Policies – in these policies the main objective is to grow the invested capital by regular or single premiums. Common types used is whole of life, universal life and variable life which are very popular in the US
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