Life Insurance Basics: What is Life Insurance?

By Compuquotes Team on May 24th, 2009

Life insurance is a contract between an insurance company and a policy owner in which the insurer agrees to pay an amount of money in the event of the insured person's death or other circumstances like terminal illnesses. The policy payer in return, pays an agreed amount that is called a premium at intervals or lump sums.

One stipulation of insurance is that the insurer will pay the insurance claims to the beneficiaries of the insured if an insured event that is covered by the policy occurs. Insured events are specified events covered by the insurance policy. These events should be based on the lives of the people included in the policy. Sickness can be covered by an insurance policy.

Like any other contract, life insurance has terms that describe the liabilities and limitations of the insurer and the insurance coverage respectively. Events that are excluded from coverage are generally written in the contract to limit the insurance company's liability. One example of exclusion is suicide.

Life-based insurance has two major types. Protection policies are those that are designed to grant benefit upon the occurrence of a specified event. The insurance claims are usually paid in lump sums. Term life insurance is an example of this policy. Another type is investment policies. The objective of these is to assist the build up of cash value by regular premiums. The common forms of these policies are whole life, variable life and universal life insurance.

The parties involved in insurance contracts are the insurer, the policy owner, the insured, and the beneficiaries. The insured and the policy owner are often the same person, but there are circumstances that they are two different individuals. A wife who purchases insurance for her husband is the policy owner, while the husband is the insured person. The wife is the person responsible for the payment of monthly premiums, while the husband is the person that is covered by insurance. In the event that the insured person dies, the insurance claims are then paid to the beneficiaries of the insured. The beneficiaries are normally the dependents who receive the death benefit to be paid by the insurance company. They may either be persons, business entities or organizations.

The cost of the insurance premiums are normally based on the risk that an insurer has to take to insure a person, the probability that a person will die, and the administrative costs and profits to be incurred by the insurance company. The probability of death is taken from mortality tables that are based on age, gender, and tobacco use.

In the event of the insured's death, beneficiaries are required an acceptable proof of death before they are paid the insurance claims. The normal required proof is a death certificate and a completed insurer's claim form. In circumstances where the death of the insured individual is suspicious, the insurance company has the right to investigate on the death before deciding if it has an obligation to pay the death benefit for the life insurance to the beneficiaries of the insured.

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