A life insurance policy is a contract between the policy owner and an insurer to pay benefits when a certain event happens, usually the death of the insured person. Life insurance often provides:
- A safety net for a person who has dependents, or
- Income during life
You can buy a life insurance policy for yourself, or through a group. If you purchase it through a group it's called group life insurance. Group life insurance is available to the members of a group. A group can be all the employees of a company. It can also be all the members of a union.
Either way, your coverage will be the same.
If you buy insurance on your life, you'll be the owner and the insured. You then choose one or more beneficiaries of the policy. The beneficiary is paid the insurance if you die.
Most people choose a relative or close friend as a beneficiary. But, corporations can take out a life insurance policy on the life of an important executive. It names itself the beneficiary.
A beneficiary has rights in the insurance policy unless the beneficiary is changed. These rights aren't changed just because your relationship with the beneficiary changes. Let's say you name your husband as a beneficiary and get divorced. Your ex-husband remains the beneficiary until you change the policy.
When you apply for insurance the process is called underwriting. The insurance company can deny your application if it wants to. This decision is based on many factors. Approving an application and deciding how much to charge for a policy depends on several factors. These include:
- Financial condition
- Health habits
- Marital status
- Number of children
The riskier you are in terms of your health or behavior, the higher the premium. Applicants with certain medical conditions can have trouble getting insurance at a reasonable price or at all. 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. They fall into two classes. The first is called term insurance. The other is commonly called whole life or sometimes permanent insurance.
Term Life Insurance
You buy term insurance for a short and specific period of time, such as 10 or 20 years. Premiums may remain steady for the term or may start off low and increase towards the end of the term.
A policy may have a premium of $150 per year for five years and a $100,000 death benefit. If you die during those five years your beneficiary gets $100,000. If you don't, the policy ends and the insurance company doesn't pay anything.
Key features of term life insurance include:
- A term life insurance policy doesn't build up any cash value
- It isn't an asset of the insured
- The insured can't surrender the policy early and withdraw any cash
Whole or Permanent Life Insurance
Whole or permanent life insurance covers you for life. It has a death benefit, like term insurance. It also has an investment feature. This is called "cash value." The simplest form of this insurance has fixed premiums and a fixed death benefit.
Key features of whole or permanent life insurance are:
- Permanent life insurance is an asset
- The insured 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 when the insured dies
- 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.
Questions for Your Attorney
- Who should own the policy, the insured, the beneficiary or someone else? Are there tax issues to think about?
- Is it better to buy permanent life insurance, or buy cheaper term insurance and invest the premiums saved?
- What types of things are covered by an incontestability clause?