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Charles Armstrong

The Daily Angle

Life Insurance is a type of insurance policy wherein the insurer agrees pays a sum of money should the insured party die or (in some cases) become afflicted with a terminal illness. For this coverage, the policy owner must pay the insurer (usually an insurance company) a premium, usually in recurring installments (monthly, quarterly, annually, etc.).

Insured Parties, Owners, and Beneficiaries

It should be noted that unlike other types of insurance, (e.g. Car Insurance, Health Insurance) with life insurance it is common for the insured party, the policy owner, and/or the beneficiary to be different people. While the insured party is often the owner of the policy (e.g. the policy has been taken out on the owner's own life) the owner cannot technically be the beneficiary of the policy as he would necessarily have to be dead before he could collect his insurance.

Examples

• Bob takes out a life insurance policy on his own life. He names as the sole beneficiary his wife. Bob personally pays the premiums on the policy and, should he die, his wife would receive from the insurance company the money dictated in the policy. Bob is both the insured party and the policy owner, while his wife is the beneficiary.

• Samantha takes out a life insurance policy on her elderly father and names herself the beneficiary. Samantha then pays the premiums on the policy while her father is alive. Should her father pass away, Samantha would receive the money dictated by the policy. Samantha is the owner and the beneficiary of the policy, while her father is the insured party.

• Rebecca takes out a life insurance policy on her husband and names as beneficiary their only child. As owner of the policy, Rebecca pays the premiums on the policy, though should her husband die their child would receive the insurance payment dictated by the policy.

Types of Life Insurance

There are two primary types of life insurance: temporary (or term), and permanent. "Accidental Death" insurance is also, technically, a type of life insurance, though it is usually described distinctly from other types of life insurance.

Temporary (Term) Life Insurance

Temporary (or term) life insurance is life insurance that provides coverage over a specified period of years at a specified premium. The three primary factors governing a temporary insurance policy are the total benefit (the "value" of the policy), the premium, and then length of the term, with different insurance companies offering different combinations of these parameters depending on the policy. If the insured party dies before the end of the specified term, the insurance company pays his beneficiary(ies) the value of the policy. If he does not die before the end of the term, the insurance company pays nothing and keeps the premiums paid for the duration of the policy.

For example, an insurance company may offer a five year term life insurance policy where the premium remains constant but the total benefit decreases some amount each year as the insured party ages and, therefore, becomes more likely to die. In a policy such as this, the value of the policy is often pegged to the value of the insured party's mortgage, so that in the event of death the family (or beneficiaries of the insured party) are capable of paying for the insured party's mortgage.

Permanent Life Insurance

Permanent life insurance policies are those that do not expire until the policy pays out (e.g. until the insured party dies or the policy expires). Since they tend to be in place for long stretches of time, the policies accumulate cash value with the premium payments over the course of the contract, thereby somewhat off-setting the risk to the insurer. Many of these policies also have a cancellation or surrender value, whereby the insured party can terminate the policy before death and receive a predetermined sum fractional to the total value of the policy.

There are three general types of permanent life insurance: whole life, endowment, and universal life.

Whole Life

Whole life coverage life insurance generally refers to a situation whereby the policy owner pays a fixed, annual premium over the course of the policy (e.g. until death) with a predetermined payout value.

Endowment

Endowments are policies wherein the value built up inside the policy (from the aggregation of premiums) equals the total payout value of the policy when the insured party reaches a certain age.

Endowments are paid out regardless of whether the insured party dies, so long as he or she reaches the endowment age. As such, the premiums tend to be significantly greater than other types of permanent life insurance.

Universal Life

Universal life insurance is a type of policy that provides greater flexibility than traditional whole life or endowment life insurance policies. There are myriad types of Universal Life insurance policy, but in general these include a cash account, whereby the insured party's premiums go into said account and accumulate interest, similar to an IRA. The payout value of the policy is tied to the future perceived value of the account. This allows for flexible premiums and payout values, though leaves some ambiguity as to the expected account payout, depending on policy.

Accidental Death Insurance

Accidental death insurance is a type of insurance wherein the insurer pays out a sum of money should the insured party suffer an accidental death; this does not include death from illness or suicide. While technically a type of life insurance as the insurer pays the beneficiary following the death of an individual, accidental death insurance is often described as its own type of insurance, as other more common types of life insurance also cover accidental death.