Life Insurance

Life insurance is a type of insurance that pays a benefit after the death of the insured. Terminal illness, critical illness, and dismemberment are also sometimes covered under life insurance policies. There are several parts to a life insurance contract. The insurance company is the insurer and receives a premium from the policy holder. The policy holder is usually the beneficiary, but may or may not be the insured person. For example, a wife who takes an insurance policy out on her husband is the policy holder and beneficiary. Her husband is the insured party.

There are two types of life insurance.

Temporary Life Insurance

The most common form of temporary life insurance is term life insurance. This type of insurance is considered temporary. It does not accumulate a cash value. A death benefit is paid to the beneficiary if the insured party dies. There are 3 primary components of term life insurance:

  1. The death benefit or face amount.
     
  2. The premium paid by the policy holder.
    3.  
  3. The length of coverage, or, the term.
    4.  

In the most general sense, the insured is insuring their life for the face amount for the term. If the insured dies before the term, the face amount is paid to the beneficiary. If the insured does not die during the term, nothing is paid out and the insurance company retains all premiums paid.

Death by suicide generally results in the face value not being paid by the insurance company.

Permanent Life Insurance

Permanent life insurance does not have a term and does not expire. It remains in force until the policy pays out, or, matures. However, if the policy holder fails to make a premium payment the policy is said to lapse. The policy is cancelled and no benefits are ever paid.

This type of life insurance builds cash value over time. The policy holder can access equity within the policy through cash withdrawal, borrowing against the policy, or surrender. If the policy is surrendered the policy is cancelled and a portion of the benefit is paid out.

There are three types of permanent life insurance: Universal Life, Whole Life, and Endowment Life.