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Life insurance
is a contract between an individual (the policy owner) and an insurance company (the insurer) where the insurer agrees to pay a designated beneficiary a sum of money upon the death of the individual. Some insurance policies also cover other events, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount of money for the life insurance, at regular intervals or in a lump sum. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil commotion. There are two basic types of life insurance: whole life insurance and term life lnsurance.
Whole life insurance is a life insurance policy that remains in force for the policy owner (or insured's) whole life and requires (in most cases) premiums to be paid every year into the policy.
Term life insurance provides coverage at a fixed rate of payments for a limited period of time. After that specified period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or obtain further coverage with different payments and/or conditions. If the insured dies during the term, the death benefit will be paid to a specified beneficiary. Term life insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis. Term life insurance is not generally used for estate planning needs or charitable giving strategies, but for pure income replacement needs for an individual. Term life insurance functions like most other types of insurance in that it satisfies claims against what is insured, if the premiums are up to date and the contract has not expired. There is no return of premium dollars if no claims are filed. As an example: auto insurance will satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or destroyed (by fire, for example.) Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage, the insurance company will not refund the premium. This is purely risk protection, and the same applies with term life insurance.
Some life insurance policies also build a predetermined cash value over the life of the contract. All, or part of, this cash value is available for later withdrawal by the client under specific conditions. However, on most cash value policies like whole life insurance, the only way to receive the cash value is to cash out the policy. The beneficiaries receive the face value of the insurance - not the cash value with whole life policies. Financial advisers are generally very helpful in determining which type of life insurance policy best fits your needs.
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