Life insurance is usually a legal contract between an insurer and an insurance holder or insurer, where the insurer pledges to pay out a designated beneficiary an agreed amount of cash upon the demise of an insured individual. In return, the insured pays premium payments to the insurer on a regular basis. The insurance contract typically stipulates the type of death benefit that the beneficiary will receive. It also stipulates when the beneficiary can access the cash. There are different types of life insurance policies including term life, whole life, universal life, variable life and indemnity life insurance policies.
Variable life insurance policies pay a specified amount of cash minus a predetermined percentage from the face value of the policy while universal life insurance policies provide a cash value on death benefit that stays constant until the policy holder dies. Variable life insurance policies are very risky because the insurer is not certain of future death benefit rates; therefore, the policy holders often take extreme precautionary measures to insure that they are not cheated out of their cash value. Usually the insured pays premiums based on the perceived risk of death benefit being awarded. When the insured person dies, the insurance company must pay out the difference in cash.
Universal life insurance policies permit the policy owner to choose any cash value at any point of time.
A premium is paid every month to the insurer and the policy remains valid until the policy expires or becomes unused. Once the expiration date occurs, the premiums are paid to the beneficiary. Many people choose universal life insurance policies because of their flexibility and ability to keep cash value even after the policy has expired.
Whole life insurance policies, on the other hand, are the most risk intensive of all the types of policies. The term, however, does not connote financial strength but refers to the fact that the payout to the beneficiary is in constant, albeit reduced, cash amounts. For this reason, whole life insurance policies often have to be repaid even when the insured has been dead for a long period of time.
Term life insurance policies can also be called level term life insurance policies.
Again, term life insurance policies can only provide death benefits for a fixed term. When the insured dies during the term of the policy, the face value of the policy is paid directly to the beneficiary. Once the insured dies during the term, the beneficiary is entitled to the remaining balance in fully amortized form. However, there are several tax benefits that come with term life insurance policies.
There are two riders included in life insurance policies. The first rider is named the suicide rider. This rider is imposed by states and is intended to assist policyholders who have committed suicide in paying the cost of their life insurance policy in the event that the policyholder has died. The second rider is commonly called the contingent damage rider. This rider is imposed by most states and requires the insurer to compensate the named beneficiary if the named beneficiary proves to be beyond the scope of the named policyholder’s coverage.
Most insurance companies offer the suicide rider as a part of their contract.
Some insurance companies offer these policies as an add-on coverage in addition to the main policy. These policies are usually available at much higher premium than other policies are. A policyholder may consider suicide as the basis for the high premium or he may choose to take his chances at life without the coverage.
There are also lifetime premium payments that some life insurance companies include in their contracts. If the life insurance company opts to charge a lifetime premium payment, the amount will never change. This means that the same premium payments will never change throughout the life of the policy. Such lifetime premium payments are based on the fact that insurance companies have a good understanding of how people will spend their money over their lifetimes. With these kinds of policies, the insurance company can anticipate that the policyholder will not change his or her spending habits and will be committed to the policy throughout his or her lifetime.