A life insurance is a legal contract between an insurance policy holder and an insurer (insurance company), in which the insurer promises to pay the illustrated benefits in exchange for paid premium (either regularly or as one lump sum), at the event when the insured dies. It describes the limitations of the insured events, with specific exclusions (i.e., suicide, fraud, war, riot, and civil commotion) written in the contract to limit the liability of the insurer. The insurance policy holder may be the insured. If not, there must be an insurable interest between the policy holder and the insured so that the insurance policy can be put in effective. The insurable interest exists between A and B is when a loss of A will cause B to suffer a financial or other kind of loss.
Doesn't it sound like the life insurance should be called as "death insurance" as by definition the insurer pays upon a death event?
Nowadays, other events such as terminal illness, critical illness and chronic illness are becoming triggers for the insurer's payment. Fairly unique for National Life Group, critical injuries (i.e., coma, paralysis, severe burns, and traumatic brain injury) is also the trigger for the insurer's payment. Those are called as the living benefits of a life insurance. That is, the policy owner and/or the insured can benefit from the life insurance when he/she is still alive.
For those have the interest to know more about life-long financial protection, you may need to take a look at a financial product called annuity. It also offers a different angle of the life-long financial protection that guards the you against outliving traditional retirement assets.
A life insurance policy can be classified as a personal or a group policy, a permanent or a term policy, a participating or a non-participating policy, and a fixed or a variable policy. But the modern world categorizes the life insurance into two ends: a protection-based life insurance and an investment-based life insurance.
Protection-based policies are designed to provide benefits in the event of a specified occurrence. Term insurance is a typical type of such kind. It is also called as pure life insurance.
Investment-based policies are designed to focus on the growth of capital from the paid premiums. Whole life, universal life, and variable life insurances are typical types of this kind. They are also called as permanent life insurances.
In terms of the tax benefits, premium contributions are after-tax money and are not tax deductible (like Roth IRAs). The death/living benefits are income tax free, so as the cash value growth for an investment-based policy, per IRS section 101(a)(1).
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