Life insurance provides benefits to a person or organization upon the death of the insured. Life insurance policies can be owned by anyone, but the insured is a single named person. Someone who is the guarantor on the policy pays the policy premiums; the guarantor may not necessarily be either the owner or the insured. An example would be that a mother purchases a policy on a child and that child is both the owner and the insured, but is not paying the premium.
An insurance policy will list a beneficiary of the proceeds upon the insured’s death. The beneficiary may be a person or an entity.
Life insurance is generally used to cover expenses for burial and other incidentals that have occurred due to the insured’s death. In some cases, these policies are paid in one complete payment. They may also be paid over a payment plan. In either case, these types of policies have no cash value other than the face of the policy and they are called term insurance policies.
Term insurance policies are generally very simple in nature. You pay in and the insurance company pays out on the death of the insured. Term insurance can be written for a length of time, such as to cover the length of a mortgage, or they can be part of financial planning. Some term policies may be converted over to a whole life policy at the end of the term.
Whole life, universal life and variable life policies can accrue dividend payments or a cash accumulation, which can be used as cash if needed. A policyholder may take out a loan against any of the life insurance policies once they have accumulated a cash value. The loans must be paid back to the insurance company and the policy remains in effect. Any loan against a life insurance policy is not taxed as income.
Premium payments for any life insurance product are determined by mortality rates and are set by the insurance company’s underwriting department. The mortality rates are determined by age, sex and the use of any tobacco products. Other rate considerations are made for family health history and certain employments.
A health background check may be required in order to purchase some life insurance products, and life insurance companies have the ability to deny coverage to someone for any number of reasons.
Claims for benefits may be paid out upon proof of death and there payments may be paid as an annuity or a single payment.
There may be instances where payment may not be made at the time of death due to the nature of the death. Most life insurance companies have clauses that deny benefits due to suicide within a set amount of time after the policy is written.