What is life insurance? Types of life insurance
Life insurance is a contract made between an individual and an insurance company. The insured person pays a premium in exchange for the promise of a lump-sum payment, called “a death benefit”, to a designated beneficiary when the insured person dies. The term ‘beneficiary’ means the person or entity designated to receive the death benefit from a life insurance policy.
Life insurance limitations
These policies generally have specific terms describing the limitations of the insured events. This type of insurance is different from general insurance, where the amount paid is proportional to the damage or losses incurred.
For example, some specific exclusions that limit the liability of the insurer may include suicide, fraud, riot and civil commotion.
In this type of cover, the person being insured and the policy owner can be different (in the case of a son buying a policy for his father). Death benefits from virtually all types of life insurance policies are income tax-free.
Typically, the policy owner is responsible for paying the premiums and has control over the policy, including the right to name or change the beneficiary.
Zurich, which has a Beginner’s Guide to Life Insurance, has the following definition of the term:
“Life insurance provides financial help for your family when you die and they can no longer rely on your income. It sounds a little morbid, but you wouldn’t leave your home uninsured, or drive your car without insurance, so why wouldn’t you financially protect your family too?”
Financial advisers say life insurance is a safety blanket that helps you prepare for the unexpected.
There are various different types of life insurance, depending on the needs of the individual.
According to Policyscout.com, life insurance is generally split into two classes: temporary and permanent.
Term insurance
This type of insurance provides financial protection for a certain period (i.e., 30 years). Premiums are usually guaranteed for that time and remain the same. However, after the specified period policies may offer continued coverage at a much higher rate. Term life insurance is less costly than permanent life insurance.
The three main factors to be considered in a term life insurance are:
- how much is given upon death,
- how much the premium(s) cost, and
- the long coverage is for.
Term insurance is useful in replacing any lost income during working years, ensuring that a family’s financial goals (such as mortgage payments and college tuition) are secured.
Permanent insurance
There are four different forms of permanent insurance: universal life insurance, whole life insurance, limited pay and endowments.
-
Universal life insurance
This is a type of insurance which provides coverage throughout a person’s life (with no set period). As opposed to whole life insurance, universal insurance policies let you increase or decrease premium costs.
Because of its lifetime coverage, the universal type is more expensive than term insurance. Universal life insurance is a common way of providing a guaranteed death benefit coverage and replacing long term income.
-
Whole life insurance
This type of insurance provides a person with lifetime coverage. Premiums are usually fixed. As opposed to term life insurance, whole insurance has a cash value which acts as a savings component and allows a person to accumulate tax-deferred savings.
-
Limited pay
In this case the premiums are paid over a certain period, after which no additional payments are due. Pay periods may be 10 to 20 years long and are paid out at around the age of 65.
-
Endowments
In this policy the cumulative cash value is equal to the death benefit at a certain age, known as the endowment age.
Policies often offer riders, which are optional benefits that can be added to a policy at an additional cost, providing benefits such as accelerated death benefit, waiver of premium in case of disability, or term conversion options.
The cost of life insurance
Insurance companies use rate classes, or risk-related categories to evaluate what the premium costs should be. According to Fidelity, the typical risk-related categories are:
- Standard – Good health and a somewhat low-risk lifestyle.
- Preferred – Very good health and low-risk lifestyle.
- Super-Preferred – Excellent health and a very low-risk lifestyle.
There are other factors that determine a person’s rate class, such as tobacco use and family medical history.
An ancient business
The life insurance business stretches back thousands of years. In ancient Rome, there were ‘Collegia Funeraticia’ (Latin for ‘Burial Clubs’) which covered members’ funeral costs and assisted survivors financially.
Life insurance as we know it today, i.e., modern life insurance, started in the United Kingdom in the seventeen hundreds. The Amicable Society for a Perpetual Assurance Office, which was founded in London in 1706 by William Talbot and Sir Thomas Allen was the first company to offer life insurance. Policyholders paid a yearly renewable premium.
Since then, the business has evolved significantly. Today, there are dozens of different products for those wishing to insure their lives.
A huge industry today
-
Wide range of products
Today, there are many different types of insurance policies apart from life insurance, examples include car insurance, home insurance, health insurance, disability insurance, dental insurance, vision insurance, long-term care insurance, travel insurance, auto liability insurance, comprehensive auto insurance, homeowner’s insurance, renters insurance, pet insurance, business insurance, product liability insurance, professional liability insurance, directors and officers insurance, commercial property insurance, marine insurance, aviation insurance, and cyber insurance.
There are several hundred types of insurance policies available globally today when we consider all subcategories and specializations.
-
It is massive
The global insurance market, which includes life insurance and all other types of coverage, reached $5.938 trillion in 2022, and is expected to exceed $6.478 trillion in 2023. Future growth is predicted to be strong. According to statista.com, it should reach $8.398 trillion for the year 2026.
Video – What is life insurance?
This video, from our YouTube partner channel – Marketing Business Network, explains what ‘Life Insurance’ is using simple and easy-to-understand language and examples.