Life insurance is a typical insurance policy where by the requirement of a payout is the death of the policy holder, with the money going to the noted beneficiaries, usually the family of the decedent. It is a common form of policy taken out by those with family obligations.

Like most insurance policies life insurance is hedging the risk of some monetary loss, in this case should the policy holder die and not be able to support their family. The policy holder is required to pay monthly payments in to the policy, and if they die a lump sum is paid out. The logic behind this is that the small losses of paying a monthly fee is better than the potential big loss should death occur.

The amount a policy holder must pay for life insurance depends on the insurer and their assessment of risk. Should they determine that the policy holder is highly likely to pass away in the next few years, premiums will be sky high, or they may not be able to obtain a policy at all. This is usually the case with people who already have a life threatening illness. The insurer is banking that the majority of the life insurance holders do not die prematurely, and thus they receive enough money for a profit. It may also be more costly for those that work dangerous jobs, such as an ice road trucker, compared to an office worker. Age and general health are also often taken in to consideration before terms are agreed.

Insured events that may be covered include:

• Serious illness

Life-based contracts tend to fall into two major categories:

• Protection policies
• Investment policies

Costs of Life Insurance

The life insurance company calculates the policy prices with intent to fund claims to be paid and administrative costs, and to make a profit. The cost of insurance is determined using mortality tables calculated by actuaries. So it is very important to shop around for the best and most cost effective policy that will give you peace of mind.

 Types of life insurance

Life insurance may be divided into two basic classes – temporary and permanent or following subclasses:

Temporary Term Insurance

• Term Insurance – provides for life insurance coverage for a specified term of years for a specified premium. The policy does not accumulate cash value. Term is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else.

Permanent life insurance

• Universal Insurance – is a relatively new type of insurance and is intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. A universal life insurance policy includes a cash account. Premiums increase the cash account. Interest is paid within the policy (credited) on the account at a rate specified by the company. Mortality charges and administrative costs are then charged against (reduce) the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any. Universal life insurance addresses the perceived disadvantages of whole life. Premiums are flexible. Depending on how interest is credited, the internal rate of return can be higher because it moves with prevailing interest rates (interest-sensitive) or the financial markets
• Whole Life Insurance – provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Also, the cash values are generally kept by the insurance company at the time of death, the death benefit only to the beneficiaries. Riders are available that can allow one to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates over time. Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy. Cash value can be accessed at any time through policy “loans”. Since these loans decrease the death benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary upon the death of the insured; the beneficiary receives the death benefit only. If the dividend option: Paid up additions is elected, dividend cash values will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary.
• Limited-Pay – is another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65
• Endowment Life Insurance – are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier.