InsuranceLecturer — Life insurance is a contract between a life insurance company and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to one or more named beneficiaries when the insured person dies in exchange for premiums paid by the policyholder during their lifetime.
What is term life?
This is life insurance for a fixed period of time. This has no cash or investment value. Your premiums cover the set amount payable in the event you die within the period. If you live past the set date, all the premiums paid are lost.
This is the cheap life insurance option for younger people. You should consider buying renewable or convertible policies which allow you the right to renew or to convert the policy into a permanent policy when you can afford it.
What is permanent life?
Unlike term life which only covers you for a set period of time, this policy is intended to last throughout your life. The set-up fees are higher but, because there are tax advantages, it can represent a good long-term investment.
In the standard policy, the premiums stay the same throughout your life and, because of inflation, become increasingly affordable. This loss in value is offset by the presence of a cash or investment value to the policy which accumulates value over your life.
What is whole life?
This is the simplest permanent life insurance because it gives the insurer the responsibility of managing the investment of the premiums. All you do is pay the premium and wait. The downside is the insurance companies charge a management fee which reduces the value paid out.
What is universal life?
This allows you as the policy holder to have a more direct say in the investment of your premiums. This allows you to react to market forces.
What is variable life?
This is an expensive option because the fees are higher but you have more freedom to select the investments. More importantly, unlike whole life and some universal life policies, there is no guaranteed minimum return. If you fail to make the best decisions, you bear the cost.
What are the main terms to look for?
Life insurance policies are often complicated and long documents but you should always think about the following terms before you buy. Check through the exclusions and limitations.
Most policies exclude the right to claim for deaths in civil disturbances like riots, terrorist attacks or wars. Make sure you are covered in all the most common situations.
One specific limitation is the suicide clause. Again, terms vary depending on how suicide is defined or to be proved, and what happens if you do decide to kill yourself. Are there any incontestable provisions? This can be very important on health issues and causes of death.
Always check when the probationary period ends and the provisions become incontestable. Finally look for a reinstatement clause to define what happens in the event you default on premiums and then ask for the policy to be restored.