Life Insurance - Introduction to Life Insurance

CONCEPTS AND PERSONAL USES
Life insurance has long been a major tool in basic estate planning. Life insurance can provide an income tax-free death benefit far in excess of the premiums paid.

Concepts - insurance is based on two fundamental principles:

  • Risk Pooling - Risk is transferred from an individual to a group, each sharing the losses and has the promise of a future benefit.
  • Law of large numbers - The larger the number of individual risks that are combined in a group, the more certainty there is as to the amount of loss incurred in any given time frame.

Personal Uses:
  • Life Insurance is based on actuarial or mathematical principles, guarantees a specified sum of money upon the death of the person who is insured.
  • The true significance of insurance is its promise to substitute future economic certainty for uncertainty and to replace the unknown with a sense of security.

Strategy
If you own property in excess of your estate tax exemption amount, you may have a taxable estate. If you own a life insurance policy or name either yourself or your estate as beneficiary, you may have exposed the policy's death benefit to estate taxes. For this reason, when estate tax is a concern, an insurance policy on your life is usually best owned by someone else.

POLICY TYPES

Term Life Insurance
Term insurance is usually the least expensive form of insurance coverage and is very affordable to purchase when you're young. As you get older, your risk of dying increases, so the cost of term insurance increases exponentially. As with most other insurance coverage, you pay premiums annually, semiannually, or quarterly for the term. For this premium, you receive a predetermined amount of life insurance protection. Term insurance is very inexpensive and is generally used for a temporary insurance need. However, it only provides for death protection and there is no cash value built up from paid premiums. Statistics show that the majority of term policies lapse without collection of death benefits.

Provisions
Renewable- Most term policies are renewable up to age 70 without evidence of insurability.
Convertible- These policies have a provision to convert to permanent insurance without evidence of insurability for a specified time frame (may be less than the full term).
Waiver of Premium- If the insured becomes totally disabled; the premiums are waived during the period of disability.

Types of term insurance
  • Annual Renewable Term- Level face value with increasing premium payments.
  • Level term- Level face value, but premiums remain fixed for period of term.
  • Term to age 65 or 70- Exponentially increasing premiums.
  • Decreasing term- Level premium payments, but decreasing face value.
Whole Life Insurance
Related Articles
  1. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  2. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  3. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  4. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  5. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  6. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  7. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  8. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  9. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
  10. Investing Basics

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center