What is Life Insurance?
Life insurance provides financial benefits in the event a covered individual passes away. The beneficiaries of the policy are generally third parties rather than the insured or the insured’s estate. An insured must provide permission or consent for a third-party to purchase a policy covering her. The following are common categories of life insurance:
⁃ Whole-Life Plan – A whole-life policy provides a benefit to a named beneficiary upon the insured’s death. Coverage lasts for the remainder of the insured’s life. Because of the certainty of payout of the policy, the policy has a cumulated cash value that can be cashed out or used to secure a loan during the insured’s life. The owner of the policy pays regular premiums (that are generally locked in at a fixed rate) until the time of the insured’s death.
⁃ Limited-Payment Life – This is a variation upon the whole-life policy. All things are similar under these plans, except that the policy becomes fully funded after a certain number of payments. Once these payments are met, the owner of the policy no longer pays a recurring premium.
⁃ Term-Life Policy – Term life insurance provides benefits to a named beneficiary for a specific term from the initiation of the policy. The owner of the policy pays premiums until the end of the term. At the end of the term, if the insured is alive, the policy ends and no longer offers benefits.
⁃ Endowment Insurance – This is a less common form of life insurance in which the owner of the policy pays premiums for the term of the insurance. At the end of the term, a fixed amount is paid to the beneficiary on a certain date.
⁃ Life Annuity Policy – This form of policy requires the owner of the policy to make a single lump-sum payment or a series of premium payments to the insurer. The insurer agrees to begin making recurring payments to the beneficiary after a certain date. The payments will last until a specific date or (more commonly) until the end of the insured’s life. The lump sum is paid at one time and recurring payments to the beneficiary generally terminate upon the death of the insured.
⁃ Universal Life Policy – This type of policy combines term and life insurance into a combination policy.
These policies often exclude specific causes of death, such as suicide, war, criminal death sentence, or murder of the insured by the beneficiary.
⁃ Discussion: Why do you think people seek to purchase life insurance? Why do you think an insured’s consent is required for a third party to insure her life?
⁃ Practice Question: John is considering purchasing life assurance. He has specific plans to leave funds for individuals after he passes away. What are some of John’s options of life insurance policies?