Life Insurance Basics - What It Is And What To Expect
Life insurance is a legal contract taken out to be paid upon the death of the individual named as the insured party. The contract can be taken out by an individual or company and is between them and a company that is agreeing to pay out the agreed sum upon the death, or in some cases, permanent disability of the insured. The amount is paid to a beneficiary, which can be an individual, a company, or even the estate of the insured. Life insurance policies are often but not always owned or taken out by the insured party, but can be owned by a family member or even an employer in some cases.
The policy is paid for in monthly installments or a lump sum, called a premium, and can build equity in some cases. The total amount or value of the policy is determined at the time of purchase, and may be a wide range of amounts.
It is common to have exclusions written into the life insurance policy, to prevent excess liability for the insuring company. Suicide, fraud, and even civil unrest can all be listed as exclusions, but not all policies contain the same exclusion clauses.
Costs can vary from individual to individual even for the same policy. The premiums are usually based on the health of the insured individual, and his or her lifestyle choices, such as whether the insured smokes or otherwise uses tobacco products. Age and gender can also be determining factors for the cost of the life insurance policy. The more risk factors in the life of the insured, the higher the cost of the policy.
There are two major types of life insurance policies, and how they are handled in different situations is dependent on the type. These are Term Life Insurance and Permanent Life Insurance.
Term Life is a type of life insurance taken out for a set period of time, and typically is only paid out in the event of death during the period the policy covers. With this type of coverage, the face value of the policy can remain the same or decline, and the payments may remain static or go up.
Permanent Life is a type of life insurance that has a set cost and can be paid in full, and even grow equity in the form of its cash value. This type cannot be canceled by the insuring company, however, failure to pay the premiums can result in the expiration of coverage for the insured.
Some policies are paid out in a lump sum, and some are paid out over a period of time, in the form of an annuity, or annual payment. Proof of death, usually in the form of a death certificate, is required for the policy to pay out.
The payout of a policy may or may not be taxable, depending on circumstances such as whether it is included as part of the estate of the deceased. The premium payments made on a life insurance policy are not normally tax deductible, and a tax professional should be consulted for details.