Life Insurance Explained

The point of life insurance explained is to help you understand life insurance. Life insurance has been around as long as the United States has been a country. The point of life insurance explained is to help you understand life insurance.

The basic definition says life insurance is a contract between the policy owner and the insurer, which is the insurance company. The insurance company (insurer) agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death.

In recent years an additional condition has been added to the payout feature of a life insurance contract. This condition, or benefit, is the payout of money to individuals who contract a terminal or critical illness. This particular benefit has helped many an ill insured receive medical treatment they may not have received otherwise.

Regardless of the benefits enumerated in the policy, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in a lump sum. All policies require the payment of money, called a premium, to be put in force.

Stated another way, life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the designated beneficiaries if an insured event occurs which is covered by the policy. By the way, the policy owner does not have to be the insured.

Take the case of a married couple. Dick and Jane can buy a policy on themselves or on each other. They can buy a policy on the other and be the owner and beneficiary because of a doctrine called insurable interest.

In the world of life insurance, family members and business partners are considered as having insurable interest. The main requirement underlying insurable interest is the demonstration the buyer will actually suffer a loss if the insured dies. This makes sense when you think about it otherwise anyone could buy a policy on another person for any reason thereby creating jeopardy for the insured.

The value in life insurance lies in the economic act of negation. That is, adverse financial consequences caused by the death of the insured are negated or mitigated through the payment of the proceeds to the beneficiary. This peace of mind experience provides a relief to the policyholder as well as the beneficiary.

The beneficiary is the person who receives the policy proceeds upon the insured's death but technically is not a party to the policy. The reason is simple. The owner reserves the right to change the beneficiary at any time during the contract period.

However, if the owner elects the irrevocable beneficiary designation offered by most policies, that person must agree to any beneficiary changes, policy assignments, or cash value borrowing. As you can see, this limits the actions of the owner.

Life insurance policies are generally classified in one of two ways. The contract is either a protection policy or an investment policy. A protection policy provides a benefit in the event of a specified event. Term insurance is the most common form of protection insurance.

Investment policies have as their main objective the growth of capital. This is accomplished through either a lump sum payment or regular premium payments. Investment policies like protection policies also provide benefits in the event of a specified event. People who buy whole life, universal life or variable life insurance policies are buying investment policies.

Regardless of the type or category of policy a person owns, the common denominator is protection against loss of income. The goal is to continue life in the manner it existed prior to the loss of the insured. Always make sure any life insurance explained before you purchase it and hopefully "Life Insurance Explained" did what it's title promised.