Life insurance

insuranceLife insurance, also known as life assurance, is a contract where the insurer (typically an insurance company) promises to pay a designated beneficiare a sum of money upon the death of the insured person (the insurance policy holder). The policy holder will typically be required to pay a premium to keep the life insurance active, either in the form of a lump sum or in the form of regular payments, e.g. once a month or once a year.

Life insurance policies often include specific exclusions that limits the liability of the insurer. The insurance company might for instance elect to include exclusions in the policy that keeps them from having to pay out anything when a death is caused by suicide, capital punishment, war or riot.

Life insurance is not a modern invention; they earliest known life insurance arrangements are Chinese ones from 2000 B.C. Also, the Babylonians had life insurance as early as 1750 B.C, while the Ancient Romans formed burial clubs to help with funeral expenses and aid for the surviving family.

Below, you will find some general information on various types of life insurances. Please note that the information may not be correct for your specific insurance policy. When you are looking for a life insurance policy, it is always advisable to check the specific terms and regulations of the life insurance policies that you are interested in, to find out exactly how they work before you make any commitment. Also keep in mind that life insurance sometimes can be included in, or purchased as an add-on, to existing policies that you may already have. You can for instance contact your insurance company to find out if you can add life insurance to your home insurance, car insurance or travel insurance.

Two main types

Most life insurances fall into one of two categories:

  • Protection life insurance

A protection life insurance policy is designed to provide a benefit in the event of a specified event. The benefit will normally be in the form of a lump sum payment. A common type of life insurance that falls into this category is term insurance.

  • Investment life insurance

The main objective of an investment life insurance policy is to make capital grow. The premium can be in the form of a single large payment or in the form of regular payments, e.g. once a month or every quarter of a year. Whole life, variable life and universal life are three examples of life insurance policies that fall into this category.

Term insurance

life insurance planTerm insurance is a life insurance that will cover you for a specific, pre-determined term. You can for instance get a life insurance that will cover your for one year, five years, 15 years, 20 years, 30 years or 35 years.

Term insurance can be described as the most basic type of life insurance, since it only pays out in the event of death. A term insurance policy does not accumulate value.

Mortgage life insurance is a special type of term insurance popular among home owners. The face amount of a mortgage life insurance is intended to be equal to the amount of mortgage on the policy owner’s real estate. A married couple can for instance elect to get mortgage life insurance policies on each other to ensure that the surviving spouse will be able to afford to stay in their home if one of them dies before the mortgage is fully paid.

Permanent life insurance

Permanent life insurances is a type of life insurance that (with few exceptions) remains active until the policy matures, as long as the premiums are paid when due. In many (but not all) jurisdictions, a permanent life insurance policy can not be cancelled by the insurance company except in cases of fraud, and even in cases of fraud there is a time limit for how long the insurance company can wait to legally cancel the policy.

Examples of popular types of permanent insurance are universal life insurance, whole life insurance, endowment and limited pay.

A permanent life insurance policy will accumulate cash value. The owner of the policy can access the money by surrendering the policy and receive the surrender value. It is also possible to make withdrawals or borrow money against the policy.

Accidental death insurance

life insuranceAn accidental death insurance is a limited life insurance that will pay out to the beneficiary if the insured person dies due to an accident. Suicide will typically be excluded from the policy, together with death caused by risky activities such as parachuting, rock climbing and warfare.

Since an accidental death insurance only pay out when someone dies due to an accident, the premiums are normally much cheaper than for most other types of life insurance.

For those who wish for a somewhat more extensive coverage, there is the accidental death and dismemberment insurance (AD & D). With an AD & D policy, money will be paid out not just in cases of accidental death but also when an insured person suffers the loss of a limb or certain bodily functions due to an accident. An AD & D life insurance may for instance cover loss of hearing, loss of eye sight, and similar.