Paton Jackson

Life Insurance Explained

Life insurance is a type of insurance wherein the insured pays a premium for a period (often lifetime) and the life insurance company provides insurance coverage against the risk of death...

Life insurance is a type of insurance wherein the insured pays a premium for a period (often lifetime) and the life insurance company provides insurance coverage against the risk of death. There are many types of life insurances or assurance (in the UK) available today.

Basics:  There are 4 parties in any life insurance policy. The policyholder is the one who is buying the policy, the insured is the one against whose death the policy is made, the insurer that is the insurance company and finally the beneficiary is the person who will get the proceedings of the life insurance policy. It is mandatory that the policyholder should have a legitimate reason for insuring a person’s life.

Types of Life Insurances:

1. Temporary Life insurance.  This policy is also called term life insurance that has coverage for a fixed period of time. The policyholder needs to pay a premium for a fixed period of time for which the insurance company provides insurance coverage. This type of policy does not accumulate cash value.

2. Permanent Life Insurance.   This type of policy provides coverage till the policy matures.  A policy is said to mature when the person reaches a fixed age or dies. The policyholder needs to pay premium for the entire period.  This type of policy accumulates a cash value. The policyholder can withdraw or borrow the money or surrender the policy to receive surrender value.  There are 3 types of permanent life insurances.

2.1 Whole life insurance.  This has a level premium and corresponding cash value. Upon death of the insured, the beneficiary receives the death benefit only and not the cash value.  The policy owner can borrow loans on the cash value.

2.2 Universal life insurance.  This has a flexible premium and gives higher internal rate of return.  The policy has a cash account depending upon the premium. The surrender value equals the cash account balance.

2.3 Variable Universal life insurance.  This is similar to universal life insurance with cash account. However the money is invested by the insurance company in mutual funds for a greater return. Hence there is higher probability of increase of cash account but the risk of reduction in cash account is also present.

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