Choosing Life Insurance

Life insurance generally provides:

• A safety net for a person who has dependents, or
• A stream of income

A person may obtain life insurance individually or through a group. Group life insurance covers multiple persons such as all employees of an employer or all members of a union. The group purchases the insurance policy on behalf of its members. There are few practical differences between individual and group life insurance.

Beneficiary

An insured selects a beneficiary to the life insurance policy. The beneficiary of the policy is the person named in the insurance contract who will be paid the benefits of the policy. Usually but not necessarily, the beneficiary is a relative or person close to the insured. For example, a corporation may take out a life insurance policy on the life of an important executive to protect against the losses it would suffer if the executive suddenly died.

A beneficiary has rights in the insurance policy until another person is named as the beneficiary. For example, if a person names a spouse as a beneficiary and later gets divorced, the divorced spouse has rights in the policy until the insurance policy is amended to name a new beneficiary.

Underwriting

Underwriting an insurance policy is the process of approving an application for life insurance. This decision is based on many factors, however, an insurance company can deny an application for any legal reason. The decision to approve an application and to determine its cost depends mainly on the risk category of the applicant. Risk considerations include the applicant's:

• Age
• Condition of health
• Income
• Health habits
• Marital status
• Number of children

The higher the risk classification, the higher the premium. Applicants with certain conditions may find it difficult, more expensive, or impossible to purchase life insurance. For example, a person with a past history of cancer or AIDS may not be able to purchase life insurance.

Types of Life Insurance

There are many varieties of life insurance: term, whole, universal, and variable life to mention a few. These policies satisfy the diverse needs of consumers shopping for premium rates, various payment options, and differing levels of risk. The most basic types of life insurance are term and permanent life insurance.

Term Life Insurance

Term life insurance is bought for a short and specific period of time such as one year or five years. The insured pays a fixed premium or increasing premium for the period of the term. For example, an insured may pay a premium of $150 per year for five years for a $100,000 death benefit policy. In return, the insurance company agrees to pay the $100,000 death benefit to the named beneficiary if the insured person dies during the term of the policy. If the policy matures, and the insured has not died, the insurance company does not make any payment. Key features of term life insurance include:

• A term life insurance policy does not build up any cash value
• It is not an asset of the insured
• The insured cannot surrender the policy early and withdraw any cash

Permanent Life Insurance

By contrast, permanent life insurance covers the person for life and builds cash value. The simplest form of permanent life insurance has fixed premiums and a fixed death benefit. Key features of permanent life insurance include:

• Permanent life insurance is an asset
• The insured person has access to the built up cash value of the policy during the policy period
• The policyholder can borrow against the policy or withdraw part of the cash value without losing the death benefit
• The insurance company pays the death benefit to the named beneficiary upon the death of the insured
• If the insured outlives the policy, the insurance company pays the benefit to the insured person

Insurance companies offer several permanent life insurance products such as:

• Whole life insurance
• Universal life insurance
• Variable life insurance

These products offer various premium payment schedules, dividend payments, and interest rate-sensitive policies to fit the varying needs of consumers. The types of insurance available, their costs, and their benefits to individual consumers vary from company to company.

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