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Life insurance or life assurance is a contract between the
policy owner and the insurer, where the insurer agrees to pay a
sum of money upon the occurrence of the insured individual's or
individuals' death or other event, such as terminal illness or
critical illness. In return, the policy owner agrees to pay a
stipulated amount called a premium at regular intervals or in
lump sums. There may be designs in some countries where bills
and death expenses plus catering for after funeral expenses
should be included in Policy Premium. In the United States, the
predominant form simply specifies a lump sum to be paid on the
insured's demise.
As with most insurance policies, 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.
The value for the policyholder is derived, not from an actual
claim event, rather it is the value derived from the 'peace of
mind' experienced by the policyholder, due to the negating of
adverse financial consequences caused by the death of the Life
Assured.
To be a life policy the insured event must be based upon the
lives of the people named in the policy.
Insured events that may be covered include:
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Serious illness
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Life
policies are legal contracts and the terms of the contract
describe the limitations of the insured events. 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.
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Life-based contracts tend to
fall into two major categories:
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Protection
policies - designed to provide a benefit in the event of
specified event, typically a lump sum payment. A common form
of this design is term insurance.
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Investment policies - where the main objective is to
facilitate the growth of capital by regular or single
premiums. Common forms (in the US anyway) are whole life,
universal life and variable life policies.
Certain life insurance
contracts accumulate cash values, which may be taken by the
insured if the policy is surrendered or which may be borrowed
against. Some policies, such as annuities and endowment
policies, are financial instruments to accumulate or liquidate
wealth when it is needed.
In many countries, such as the U.S. and the UK, the tax law
provides that the interest on this cash value is not taxable
under certain circumstances. This leads to widespread use of
life insurance as a tax-efficient method of saving as well as
protection in the event of early death.
In U.S., the tax on interest income on life insurance policies
and annuities is generally deferred. However, in some cases the
benefit derived from tax deferral may be offset by a low return.
This depends upon the insuring company, the type of policy and
other variables (mortality, market return, etc.). Moreover,
other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth
IRAs) may be better alternatives for value accumulation.
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