Life insurance is a contract between the policy owner and the insurance company, where the insurance company agrees to pay the designated beneficiary a sum of money upon the occurrence of the insured individual’s or individuals’ death or other event. In return, the policy owner agrees to pay a stipulated amount (at regular intervals or in lump sums). In the United States, the predominant form simply specifies a lump sum to be paid on the insured’s demise.
The value for the policyholder is derived, not from an actual claim event, rather it is the value derived from the ‘peace of mind’ experienced by the policyholder, due to the negating of adverse financial consequences caused by the death of the insured.
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; for example claims relating to suicide, fraud, war, riot and civil commotion.
Life-based contracts tend to fall into two major categories: Term and Permanent
Term life insurance is the simplest and least expensive type of policy. It’s pure insurance with no cash value account. A term life policy has only one function: to pay a specific lump sum to whoever you’ve designated, upon a specific event – – your death. The death benefit and the policy limit are the same – – a $200,000 policy pays a $200,000 death benefit. The policy protects your family by providing money they can invest to replace your salary, as well as to cover final expenses incurred by your death.
Permanent life insurance provides both a death benefit and a cash value account. Permanent insurance premiums are higher than term life premiums because they fund the cash value account in addition to buying the actual life insurance. These policies are often referred to as cash value policies. They include Universal Life and Variable Universal Life.
Universal life insurance provides permanent protection for your dependents while offering a more flexible payment plan than term life insurance. It pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax deferred accumulation. It also does the following:
- Earn market rates of interest on your cash value account.
- Offers the right to borrow or withdraw from the policy during your lifetime.
- Allows you premium flexibility.
- Offers face amount flexibility.
Universal Variable life insurance is the type of insurance which gives you more control of cash value account policy features than any other insurance type. It also does the following:
- It pays a death benefit to the beneficiary you name and offers you low risk tax deferred cash value options.
- It offers separate accounts for you to invest in such as money market, stock, and bond funds.
- It offers premium flexibility.
- It allows you to make withdrawals or to borrow from the policy during your lifetime.
- It stipulates that if you terminate the contract in early years you will receive less cash value total return than in a whole contract.