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Uses for Life Insurance

Uses for Life Insurance

Life insurance is typically used to relieve the insured person's beneficiaries of financial burdens such as expenses for a funeral or to pay off mortgages and other debts. That is probably the use put to three quarters of all life insurance policies. That is the simplest life insurance policy that is currently being offered. It is referred to as permanent life insurance because as long as the premiums are paid, it cannot be canceled by the insurance company. The policy will remain in force until the insured person dies.

Endowment Policies

Benefits of life insurance policies can be applied in different ways. A life insurance policy can be an endowment. In this case the term (time policy is in force before payment is due) is usually shorter and the premiums higher. When the premiums paid in equal the face value of the policy, the insured can designate that payments be made to the beneficiary whether the insured lives or dies. Payments can be a lump sum or another payment schedule designated by the insured. An endowment policy can be a way of increasing income at a time of life when pensions are not sufficient. It can also be a substitute for a pension.

Investment Policies

In some cases life insurance policies may be purchased that are set up to share in the profits of the insurance company. In these cases the insurance policy increases in value as the share of the profits is added to value of the policy. The premise here is that as the collective premiums from all policy holders are invested a profit will be realized.

Viatical Settlements

This is a relatively new development in life insurance in the last 20 years or so. In this case a permanent life insurance policy is purchased from the insured, along with the right to name a beneficiary, at a discounted amount of the policy value. The purchaser would continue to pay the premiums until the insured dies. The insured person benefits by receiving a lump sum payment from the purchaser. That way they can pay living expenses and medical bills during their last days or weeks of life. Viatical settlements are commonly used in cases of terminal illness, such as cancer or AIDS, where the insured person has a strong need for support and limited options. The purchaser will become the beneficiary of the policy, receiving the lump sum payment back plus the portion of the policy that was discounted to the insured. For example, if the purchaser paid the insured 65% of the face value of the policy, he would receive the additional 35% upon the death of the insured.

This use of life insurance dismays the insurance companies because their claims payments are based not only on those policies that stay in force, but also those who cancel by not paying their premiums (the premiums paid stay with the insurance company) and some that will cash out their policies prior to maturity. With a viatical settlement, all claims will proceed to maturity and have to be paid.