Resources on Life Insurance

Life Insurance

As in all insurance, the insured transfers a risk to the insurer. The insured pays a premium and receives a policy in exchange. In this contract, the risk assumed by the insurer is the risk of death of the insured.
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How life insurance works
Life insurance 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's death. In return, the policyowner (or policy payor) agrees to pay a stipulated amount called a premium at regular intervals.
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Types of life insurance
Life insurance may be divided into two basic classes – temporary and permanent.

Temporary
This type of insurance is characterized by its defined time period that is named when the contract is initially put into force. In the case of annual renewable term (ART), this is not the case. This is due to the fact that coverage is provided for one year.

Term
Term life insurance (term assurance in British English) provides for life insurance coverage for a specified term of years for a specified premium. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else. See theory of decreasing responsibility and buy term and invest the difference.

The three key factors to be considered in term insurance are: face amount (protection or death benefit), premium to be paid (cost to the insured), and length of coverage (term).

Various (U.S.) insurance companies sell term insurance with many different combinations of these three parameters.
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Permanent
Permanent life insurance is life insurance that remains in force until the policy matures (pays out), unless the owner fails to pay the premium when due (the policy expires). The policy cannot be cancelled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. This means that a policy with a million dollars face value can be relatively inexpensive to a 70 year old because the actual amount of insurance purchased is much less than one million dollars. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.

The three basic types of permanent insurance are whole life, universal life, and endowment.

Excerpt from "Life insurance." Wikipedia, The Free Encyclopedia. 30 Oct 2006, 12:53 UTC. Wikimedia Foundation, Inc. 30 Oct 2006 http://en.wikipedia.org/w/index.php?title=Life_insurance&oldid=84609913