Life insurance (or assurance) is and agreement between an insurance providing company and the individual that takes out a policy with them. The agreement is based idea that for a recurring fee, the insurance company will payout an agreed sum to the beneficiaries of the insured (most of the time this will be family) upon the insureds death.
In some countries it is normal to have funeral expenses covered in a insurance policy, but in the UK, companies tend to simply pay out a lump sum to the beneficiaries of the insured upon his/her demise.
A life insurance contract consists of terms and these terms describe the events that the person will be covered for should they happen. There will usually be certain circumstances of death that insurance companies will not cover like riots, suicide or war.
Life based contracts will usually fall into two different categories, protection policies and investment policies. Protection policies are those that provide a benefit to those parties specified in the contract, usually a lump sum, in the event of a specified scenario. Investment policies are where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US anyway) are whole life, universal life and variable life policies.
The beneficiary refers to the person who will receive the policy proceeds (usually a lump sum) upon the death of the insured. The beneficiary can be changed at any time by the policy owner unless an irrevocable beneficiary is designated, in which case permission must be gained from the beneficiary regarding any beneficiary changes.
The policy holder and the insured are not necessarily the same person (although they usually are) but someone can take out a policy to cover someone else’s life, for example, a wife could take out a policy on her husbands life, making her the policy holder and him the insured.
Insurance companies do however want to put restraints on who can take out policies for someone else’s life. This is because if anyone can take out a policy for anyone else’s life, then there is a good chance that people will start taking out policies for people who they know will die soon or worse still, people who they intend to kill. So insurance companies sought to limit the people who can take out insurance policies on someone else’s life to only those who will suffer a genuine loss if the insured were to die, i.e. family members or those who can prove that they are close friends.
As is the case with most general insurance policies, life insurance is a contract between the insurer and the insured where a payment is made to pre-designated parties upon the occurrence of an event covered in the insurance policy, in the case of life insurance, this is usually death.
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