What is Life Insurance?


Life Insurance What is Life Insurance? Life insurance or life assurance is a contract between the policy owner and the insurer; in general the policy owner is called the insured or policyholder. After signing the contract the buyer pays the insurer a stipulated amount called premium at regular intervals, in return the insurer agrees to pay a sum of money called death proceeds to the beneficiary upon the insured’s death or other events, such as total disability or terminal illness. Buyer and insured could be two different persons, as buyer is the one who purchases a policy, and if someone buys a policy and has his own life insured, he is the buyer and the insured. So if Mr. A purchases a policy for his wife, the wife is the insured and Mr. A is the buyer. The buyer enjoys a grace period of 15 days, but if he does not fulfill the payment the life insurance company will normally send him reminders, if no further action is carried out by the buyer the policy will be terminated, it is often referred to as policy lapsed, as a result the insured no more benefits protection. What happened to a lapsed policy? If a buyer has paid the premiums of a permanent life insurance for more than 3 years, the policy has acquired accumulated or accrued cash value. In the case of delayed in premium payment the life insurance company will use the accumulated cash value to pay the premium, this is called automatic premium loan. The buyer can delay the payment of premium for sometime, but he has to make up the arrears later, or he can stop paying the premium, the policy continues to remain in force but the sum assured is reduced, this is called reduced paid-up. Another solution for a lapsed policy is that the buyer can inform the life insurance company that he wants to terminate the policy and have his cash value refunded; this is called surrender of policy. Once the policy is lapsed or surrendered, the insured will no more benefit the protection and the beneficiary receives no death proceeds from the life insurance company upon the insured’s death. In life insurance, if the insured died of old age, accident or illness, the life insurance company will pay the beneficiary a lump sum of compensation as specified in the policy. But if it is a term life insurance, the insured died after the specified period or term, there will be no compensation made because term life insurance covers the insured for a specified term only, this is the difference between term life insurance and permanent life insurance. Generally, life insurance is divided into two main categories: · Protection policies – the objective of this is to provide protection, no cash value will be built, but the premium is low, one of this is term life insurance. · Protection and investment policies – the objective of this policy is to provide protection and investment, so that the buyer can make profit. Common policies are whole life, endowment life, universal life and variable life. How to buy life insurance? Buyers can purchase a life insurance from a life insurance company or through a life insurance agent. There are other types of policy, such as fire insurance, car insurance, house insurance and general insurance, normally people purchase these types of insurance from general insurance companies. Another way is to buy life insurance online; the buyer can fill in the application form by logging into the online life insurance companies. The contract When you buy a life insurance, there is a contract made between you and the insurance company. You have to pay the premium and in return, the insurance company will pay your nominee or beneficiary a sum of money upon your demise. In the event you suffer total and permanent disability, the payment will be made to you; in these circumstances the money is usually payable in installments. Advising your nominee (beneficiary) It is important that after you purchased a life insurance policy; you need to inform the beneficiary, because he or she who in future will be the legal person to claim the death proceeds in the event of your demise. Let your nominee knows where you keep the policy, inform him or her if you have made any changes, and check if his/her address and telephone number is correct. It is advisable to have a contingent or secondary nominee in case the main nominee passes away before you. It is possible to have two or more nominees, but if so, the sharing of the death proceeds should be clearly stated. Importance of disclosure When you purchase a life insurance, you have to fill in the application form. This is to record your personal data and later transfer it to your policy. You must be sincere and all statements you made are true, such as you are a smoker or none smoker, or do you have any illness or symptom. If your detail is not clear and insubstantial the life insurance policy could be void. The life insurance company reserves the right to deny, reject or reduce the claim if the policy has suspicious statement, or investigation will be carried out to verify the truth. Suicide compensation If the insured commits suicide within the specified time (usually one to two years after the purchase date), the compensation can be nullified. Death proceeds claim The minimum required proof to claim the death proceeds is the death certificate of the insured. The beneficiary already had his/her name endorsed in the policy, he/she just fills in the claim form and shows the death certificate of the insured, he will be eligible to receive the money, normally in one lump sum. Any suspicion aroused from the insured’s death, the insurer may investigate the circumstance of the death and decide whether the claim is effective. See also how to claim the death proceeds? Types of life insurance policy Different types of life insurance for different types of people, because one man’s meat could be another man’s poison, the life insurance companies have designed many policies to meet the needs of customers. Term life insurance – this has the cheapest premium, it covers the insured for a limited time or term only. The money will be paid only if the insured suffers total and permanent disability or passes away during the specified term of the policy. To know more on this policy see also term life insurance, define term life insurance, annual renewable term life or what are the types of life insurance? Whole life insurance – this offers life-long protection to the insured but the policy has no maturity, you have to pay premiums throughout your life. The death proceeds plus the bonuses will be paid if the insured suffers total and permanent disability or passes away. See also the difference between whole life and term life insurance, whole life insurance advice, whole life insurance explanation and whole life insurance or term life insurance. Endowment life insurance – this offers protection and big savings and it has short period of maturity. The money is payable to the insured upon maturity of policy, or if he suffers total and permanent disability. See also endowment life insurance. Universal life insurance – this has similarity to whole life insurance, it is a type of permanent life insurance, the premium and cash value is adjustable at the buyer’s discretion. See also universal life insurance. Life annuity plan – this is a series of payments paid to the insured until he passes away, this policy normally recommended for retirement. Mortgage reducing term insurance – this is designed for those who apply loan to purchase property. The borrower purchases this policy to have insurance protection against unforeseen mishaps. This policy covers the repayment of the outstanding loan to the finance company in the event of the insured’s premature death, total disability or critical illness. In the event of such contingencies, the insurance company pays the finance company the outstanding balance and the finance company will in return release the ownership of the property to the owner or his beneficiaries. Supplemental insurance or rider – a supplemental insurance is a policy attached to the main life insurance, such as personal accident, medical and hospital benefit. These kinds of supplemental insurance is to provide area where life insurance never covers, such as accident, disability and hospitalization, the premium of these policies are normally inexpensive. Which policy should I buy? To choose a policy that best suits your need you have to understand the scope of coverage of the policy, and whether the premium is affordable. If you want solely life protection term life insurance is suitable. If you are young and financially stable then you should consider a policy that provides you with cash value, so that you may have saving in future. You can seek advice from the life insurance companies or competent insurance agents; they can recommend you the policy that suits you the best. How do the insurance companies operate? The life insurance company or the insurer calculates the policy prices according to mortality table, the premiums collected from the policyholders will pay for the overhead and administrative costs, and invest the money to create a pool of money to pay claims. The premiums alone normally not sufficient to cover claims and expenses, the life insurance company makes profit from investment. Glossary of insurance Accidental death benefit – this is the amount payable to the beneficiary if the insured’s death is the direct result of an accident. Age of issue – the insured’s age at the time the life insurance coverage takes effect. Annuity – a contract sold by life insurance companies to provide fixed payments on an investment to the policyholder for a life time or for a certain number of years, usually after retirement. Assignment – the act of transferring all or part of the life insurance benefit to another person. Automatic premium loan (provision) – if the buyer does not pay his premium within the grace period, the life insurance company will automatically borrow money from a policy’s cash or accumulation value to pay the due premiums, provided the policy has sufficient cash value. Beneficiary – the one who in the event of the insured’s death will receive the death proceeds. Cash value – the accumulated interest or bonus of a policy. Confidentiality of information – all the personal information of the policyholders, including medical report, to be kept confidential and the life insurance companies are not allowed to divulge to third parties. Death benefit –this is the amount payable to the beneficiary upon the insured’s death. Free look (provision) – the provision in which a time frame (normally 15 days) is given to a policyholder to review the new policy, he may cancel his policy by returning it to his life insurance company within this time frame, the premium he has paid will be refunded. Grace period – this is an additional period of time after the due date for the premium payment, if no premium is paid within the grace period the policy may lapse or subject to automatic premium loans. Guaranteed death benefit – the guaranteed amount payable to the beneficiary upon the insured’s death, no matter the insured died at whatever cause. Incontestability – incontestable means undisputable or unquestionable. If a life insurance policy has been in force for two years the insurance company cannot dispute its validity. If the insurance company refuses to make compensation, it must have sufficient evidence to proof that the policy was obtained through fraud. Lapse of policy – this means the termination of a policy due to nonpayment of premium. Life annuity – an annuity that pays a fixed income during the annuitant’s life time. Maturity date – the date when a policy ends. Policy loan – you may borrow money from your policy as long as your policy has enough cash value. You can repay the loan and the interest in a lump sum or by installment or not at all, because this can be deducted from the proceeds. Premium – regular payments to insurance company to purchase a policy and to keep it in force. Reduced paid-up – if a policy has acquired a cash value the buyer can cease paying the premiums, the policy continues to remain in force but the sum assured is reduced. Reinstatement – the buyer reserves the right to revive or reinstate his lapsed policy in force within a period of time and under certain conditions, such as declaration of his health status at the time of reinstatement and pay up the due premiums. Rider – this is a separate document or policy attached to a main policy, it limits or expands the policy’s terms or coverage, usually additional premium is required. Suicide – there will be no compensation made to the insured’s beneficiary if the insured committed suicide within one year of purchase of the policy. Surrender (of policy) – this means to terminate a policy and to have the cash value refunded. Surrender value – the amount payable to a policyholder when a life insurance policy is cancelled, terminated or surrendered. The cash value only accumulates if a policy has been in force for a number of years. Underwriter – an employee of an insurance company who evaluates the acceptability of risks solicited and therein determines the appropriate premiums. Underwriting – underwriting is the process of issuing insurance policies, to underwrite is to evaluate the risk of a potential client, and to decide how much coverage he should receive and how much premium he should pay, or whether or not to accept the risk to insure him. Why should I buy life insurance? Life is unpredictable; you do not know what is going to happen tomorrow, so there are reasons to buy a life insurance. · To provide security to your family and your loved ones in the event of your demise. · You can plan an early retirement. · To ensure that your family members are able to maintain the present living standard without your income support. · Your children are able to complete their education upon your demise. · Your spouse can manage to take care of the family without your financial support. Next

What is Life Insurance?

Life insurance or life assurance is a contract between the policy owner and the insurer; in general the policy owner is called the insured or policyholder.

After signing the contract the buyer pays the insurer a stipulated amount called premium at regular intervals, in return the insurer agrees to pay a sum of money called death proceeds to the beneficiary upon the insured’s death or other events, such as total disability or terminal illness.

Buyer and insured could be two different persons, as buyer is the one who purchases a policy, and if someone buys a policy and has his own life insured, he is the buyer and the insured. So if Mr. A purchases a policy for his wife, the wife is the insured and Mr. A is the buyer.

The buyer enjoys a grace period of 15 days, but if he does not fulfill the payment the life insurance company will normally send him reminders, if no further action is carried out by the buyer the policy will be terminated, it is often referred to as policy lapsed, as a result the insured no more benefits protection.

What happened to a lapsed policy?

If a buyer has paid the premiums of a permanent life insurance for more than 3 years, the policy has acquired accumulated or accrued cash value. In the case of delayed in premium payment the life insurance company will use the accumulated cash value to pay the premium, this is called automatic premium loan. The buyer can delay the payment of premium for sometime, but he has to make up the arrears later, or he can stop paying the premium, the policy continues to remain in force but the sum assured is reduced, this is called reduced paid-up.

Another solution for a lapsed policy is that the buyer can inform the life insurance company that he wants to terminate the policy and have his cash value refunded; this is called surrender of policy. Once the policy is lapsed or surrendered, the insured will no more benefit the protection and the beneficiary receives no death proceeds from the life insurance company upon the insured’s death.

In life insurance, if the insured died of old age, accident or illness, the life insurance company will pay the beneficiary a lump sum of compensation as specified in the policy. But if it is a term life insurance, the insured died after the specified period or term, there will be no compensation made because term life insurance covers the insured for a specified term only, this is the difference between term life insurance and permanent life insurance.

Generally, life insurance is divided into two main categories:

· Protection policies – the objective of this is to provide protection, no cash value will be built, but the premium is low, one of this is term life insurance.

· Protection and investment policies – the objective of this policy is to provide protection and investment, so that the buyer can make profit. Common policies are whole life, endowment life, universal life and variable life.

How to buy life insurance?

Buyers can purchase a life insurance from a life insurance company or through a life insurance agent. There are other types of policy, such as fire insurance, car insurance, house insurance and general insurance, normally people purchase these types of insurance from general insurance companies.

Another way is to buy life insurance online; the buyer can fill in the application form by logging into the online life insurance companies.

The contract

When you buy a life insurance, there is a contract made between you and the insurance company. You have to pay the premium and in return, the insurance company will pay your nominee or beneficiary a sum of money upon your demise. In the event you suffer total and permanent disability, the payment will be made to you; in these circumstances the money is usually payable in installments.

Advising your nominee (beneficiary)

It is important that after you purchased a life insurance policy; you need to inform the beneficiary, because he or she who in future will be the legal person to claim the death proceeds in the event of your demise.

Let your nominee knows where you keep the policy, inform him or her if you have made any changes, and check if his/her address and telephone number is correct. It is advisable to have a contingent or secondary nominee in case the main nominee passes away before you. It is possible to have two or more nominees, but if so, the sharing of the death proceeds should be clearly stated.

Importance of disclosure

When you purchase a life insurance, you have to fill in the application form. This is to record your personal data and later transfer it to your policy. You must be sincere and all statements you made are true, such as you are a smoker or none smoker, or do you have any illness or symptom. If your detail is not clear and insubstantial the life insurance policy could be void. The life insurance company reserves the right to deny, reject or reduce the claim if the policy has suspicious statement, or investigation will be carried out to verify the truth.

Suicide compensation

If the insured commits suicide within the specified time (usually one to two years after the purchase date), the compensation can be nullified.

Death proceeds claim

The minimum required proof to claim the death proceeds is the death certificate of the insured. The beneficiary already had his/her name endorsed in the policy, he/she just fills in the claim form and shows the death certificate of the insured, he will be eligible to receive the money, normally in one lump sum. Any suspicion aroused from the insured’s death, the insurer may investigate the circumstance of the death and decide whether the claim is effective.

Types of life insurance policy

Different types of life insurance for different types of people, because one man’s meat could be another man’s poison, the life insurance companies have designed many policies to meet the needs of customers.

Term life insurance – this has the cheapest premium, it covers the insured for a limited time or term only. The money will be paid only if the insured suffers total and permanent disability or passes away during the specified term of the policy.

To know more on this policy see also term life insurance, define term life insurance, annual renewable term life or what are the types of life insurance?

Whole life insurance – this offers life-long protection to the insured but the policy has no maturity, you have to pay premiums throughout your life. The death proceeds plus the bonuses will be paid if the insured suffers total and permanent disability or passes away.

Endowment life insurance – this offers protection and big savings and it has short period of maturity. The money is payable to the insured upon maturity of policy, or if he suffers total and permanent disability.