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What is Life Insurance

What is Life Insurance

Life insurance is a contract between an individual and an insurance company. The individual agrees to pay a certain fee every month to the insurance company. In return the insurance company agrees to pay the beneficiary named by the individual a lump sum upon the individual's death. The premise is that the individual will not have paid the insurance company as much money as the insurance company will pay the beneficiary.

If a person would suffer great loss upon the death of a spouse (or close relative), that person may purchase a life insurance policy on the spouse's life. As the purchaser, this person would be the one to pay the premiums. This person would also be the beneficiary of the insurance policy. They are determined to have an 'insurable interest'. Life insurance companies limit policies available to this type of situation so that a person cannot just go out and buy insurance on the life of someone they know will soon die. Otherwise there is a great risk that the beneficiary would simply murder the insured person for the money.

The amount of money that the insurance company will pay is predetermined. The policy may specify that at the time of death, they will pay the beneficiary $125,000. The policy may also state that if the insured is still alive at a certain age, say 100 years, the policy would pay out the policy sum to the beneficiary. The policy also includes special provisions, such as no payment will be made to the beneficiary if the insured commits suicide. That provision usually is satisfied if no suicide happens for two years after the initiation of the policy. The policy can also be nullified if the insured makes false representations, such as claiming to have no chronic health conditions.

Insurance companies base the amount they charge for the life insurance policy on actuary tables that predict how long the insured will probably live. Three important factors are age, gender and use of substances like tobacco or alcohol. In addition, the insurance company will ask about current health conditions and family history. Usually the insurance company requests permission to contact the insured's personal physician. Premiums (charges) for the policy increase as the age of the insured increases.

The most common reason for purchasing life insurance is to provide financial assistance to the family members when the insured dies. Expenses for a funeral are typically the first thing to be taken care of. Then there are personal debts that must be repaid. After that, the family members who no longer benefit from the paycheck of the insured, will have the policy that will attempt to compensate them for their loss.

Life insurance companies typically use the monthly premiums as a vehicle for investment to make it possible to pay the claims of those who die unexpectedly and to produce an income to pay wages, overhead and profit. The monthly premiums collected cannot come near being able to pay the claims otherwise.

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