What Exactly is Life Insurance?

Friday, January 15, 2010

Life insurance at is very simplest is a contract. It is a contract between two parties: the insurer and the policyholder. Under this contract, the insurer agrees to pay the policyholder an agreed upon amount of money in the event of the policyholder’s death, or should the policyholder have a terminal illness. In order to receive this pay out from the insurer, the policyholder aggrees to pay the insurer regular sums of money (or premiums), alternatively, the policyholder can pay the insurer in a lump sum.

Why have Life Insurance?

At its most basic, the real value from having life insurance is to have peace-of-mind in the event of terminal illness or death. The contract means that any dependents will benefit from financial security. Insured events that are typically covered by the life insurance policy can be serious illnesses that typically exclude events, such as suicide and war.

The Insured and the Policy Holder

The policyholder technically is not necessarily insuring him or herself. A husband can take out a policy for his own life; therefore he is the policyholder and the insured. However, a husband can take out insurance on his wife’s life rendering him the policyholder but not the insured person. The policyholder is always the person that has to pay for the policy, the person who is insured is simply a participant in the contract.

The policyholder dictates who the beneficiary of the payout is. They will receive payment in the event of the insured person’s death. Therefore, the policyholder decides who the beneficiary is and can change this beneficiary unless the contract limits this option.

The contract may also contain special clauses, such as in the event of suicide within a specified time-frame, the policy can be negated. In typical cases, the policy matures in the event of the insured party’s death or when the insured party reaches a specific age, for example ninety years old.


Francis Billingham