A Broad Definition of Life Insurance

Life insurance is a contract between the policy holder and the insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment.

In return, the policy holder agrees to pay a stipulated amount (the "premium") at regular intervals or in lump sums. In some countries, death expenses such as funerals are included in the premium; however, in the United States the predominant form simply specifies a lump sum to be paid on the insured's demise.
The value for the policy owner is the 'peace of mind' in knowing that the death of the insured person will not result in financial hardship.

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot and civil commotion.
Life-based contracts tend to fall into two major categories:
  • Protection policies – designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.
  • Investment policies – where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US) are whole life, universal life, and variable life policies.
There is a difference between the insured and the policy owner (policy holder), although the owner and the insured are often the same person. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured. The policy owner is the guarantee and he or she will be the person who will pay for the policy. The insured is a participant in the contract, but not necessarily a party to it. However, "insurable interest" is required to limit an unrelated party from taking life insurance on, for example, Jane or Joe. Also, most companies allow the Payer and Owner to be different, e. g., a grand parent paying premiums for a policy on a child, owned by a grandchild [or vice versa].

The beneficiary receives policy proceeds upon the insured's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary, that beneficiary must agree to any beneficiary changes, policy assignments, or cash value borrowing.

In cases where the policy owner is not the insured (also referred to as the celui qui vit or CQV), insurance companies have sought to limit policy purchases to those with an "insurable interest" in the CQV. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The "insurable interest" requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies on people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least one case, an insurance company which sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful death of the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).



I hope this taught you guys some good info about life insurance!

23 comments:

Steve said...
June 24, 2011 at 12:48 PM

Very informative, thanks alot.

-E- said...
June 24, 2011 at 2:18 PM

better to just have a nest egg.

#19 said...
June 24, 2011 at 7:30 PM

Life insurance can be a scary thing to think about but very important!

Bart said...
June 24, 2011 at 7:36 PM

its a start.

Necroticism said...
June 25, 2011 at 12:53 AM

This is a very important choice in life.

heefal said...
June 25, 2011 at 8:00 AM

excellent and useful article, will reflect on this

Triper said...
June 25, 2011 at 8:11 AM

Good reading foe. keep posting.

Jblogger said...
June 25, 2011 at 4:48 PM

interesting stuff

braumaman said...
June 25, 2011 at 7:43 PM

Never been a fan of the idea behind this.

Zach said...
June 26, 2011 at 6:15 AM

Great info!

The_illustrative_Mind said...
June 26, 2011 at 2:10 PM

I just got this recently. Thankfully, it doesn't cost all that much but it's very important nonetheless.

Kicking Rocks said...
June 27, 2011 at 4:19 PM

with those letter, you can get a big score!

Kamatacci said...
June 28, 2011 at 9:44 PM

All I know is funerals are too freaking expensive.

Red13 said...
June 30, 2011 at 6:46 AM

thanks for the info!

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Anonymous said...
August 21, 2012 at 12:34 AM

nice

Amelia said...
August 21, 2012 at 9:30 AM

I do understand the usage of life insurance policy and is planning to buy this policy. But I am confused between the various life policy options. In this article you have nicely explained the meaning of this policy and provided an absolute definition.
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