Life insurance is a contract between an insured and an insurer whereof the insurer promises to pay the beneficiary a sum of one upon the death of the insured person. Depending on the contract occurring terminal illness may also trigger payment. The policy holder typically pays a premium, either regularly or as a lump sum. When the insured dies, funeral expenses are also sometimes included in the benefits.
The advantage is that the policy owner has a peace of mind knowing that the death of the insured person will not result in financial hardship for loved ones.
Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot and civil commotion.
Examples of life insurances
- Permanent life insurance is life insurance that remains active until the insurance policy matures, unless the insurance owner fails to pay the premium on time. The policy cannot be cancelled by the insurer for any reason except in cases of fraud. I such a case, a cancellation must occur within a period of time as defined by law. A permanent insurance policy accumulates as cash value, reducing the risk to which the insurance company is exposed, and thus also reduces the insurance expense over time. This means that a policy with a million dollar face value can be relatively expensive to a 70-year-old person. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receive the surrender value.
- Accidental death is a limited life insurance designed to cover the insured should they die due to an accident. Accidents include anything from an injury but do not typically cover deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurance policies. Accidental death policies rarely pay a benefit, because the cause of death is not covered by the policy, or the coverage is not maintained after the accident until death occurs. To be aware of what coverage they have, an insured should always review their policy for what it covers and what it excludes.
- Endowments are policies in which the cumulative cash value of the policy equals the death benefit at a certain age. The age at which this condition is reached is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier.
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