Life Insurance

• How life insurance works

In life insurance there are four roles: the life insurance company, the policy owner, the insured individual, and the beneficiary.  (Technically, the last three roles can all be filled by the same person.  Also, a single policy may cover more than one insured and may have more than one beneficiary.)

The life insurance company pledges to pay a death benefit to the policy’s beneficiary upon the death of the insured, so long as the policy is in force at the time of death.  The policy owner is responsible for paying premiums in order to maintain the poilcy in force.

• The purposes of Life Insurance

The most common purpose of life insurance is to protect the finances of one’s family or friends in case of a wage-earner’s death, but that’s not its only use.  Life insurance can be used:

•To hire childcare to replace a home-maker’s contribution
•For estate protection
•For mortgage protection
•To fund a retirement
•To protect a business against the loss of a key employee
•As an employment benefit

• Types of Life Insurance

Life insurance is understood best by dividing all types of life insurance into three categories: term life insurance, whole life insurance,  and universal life insurance.

Term life insurance requires fixed payments on a fixed schedule and provides coverage for a fixed duration (e.g. 10 years).  The policy only pays a death benefit if the insured individual dies before the policy expires.

Whole life insurance requires fixed payments on a fixed schedule.  These policies guarantee coverage up to a certain age (usually 100 years of age).  These policies guarantee a death benefit, so even if the insured individual outlives the policy, a death benefit will still be paid.  These policies carry cash value, which means that they can be liquidated.

Universal life insurance allows payments of any amount at any time (up to certain government-stipulated maximums).  Coverage from these policies can be maintained indefinitely.  These policies carry cash value, which means that they can be liquidated.

Three questions present difficulty for most life insurance buyers

1.How big of a death benefit do I need?
2.How long do I need coverage?
3.Where should I buy life insurance?

• Components of a life insurance policy

•Cash value — An interest-bearing savings account included in permanent life insurance policies.
•Death benefit — A payment or series of payments made to a life insurance policy’s beneficiaries upon the death of the policy’s insured individual(s).
•Health class — An insurer’s evaluation of an individual’s health.  This datum is used to calculate the individual’s mortality risk.
•Premium — A payment from the policy owner to the insurance company.
•Quotes — Life insurance quotes are price estimates made before the application process.
•Rate — The price required to maintain a life insurance policy.
•Rate class — (see health class)
•Riders — You can add features to your policy by attaching a document called a “rider.”
•Taxes — Life insurance is generally free of income tax.

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