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. Trading Strategies

    Adjust Market Strategies To Elevated Risk

  2. Fundamental Analysis

    How to Create a Personal Risk Management Plan

  3. Investing Basics

    Want to Beat the Market? Take on Some Risk

  4. Trading Strategies

    Three Types Of Profit Protection Stops

  5. Professionals

    Worried About Stocks? Try on Convertibles

RELATED TERMS
  1. Net Line

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

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

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

    The absolute level of a fund's investments.
  5. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  6. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...

RELATED FAQS

  1. Does index trading increase market vulnerability?

    Learn how the rise in popularity of passive ETFs and mutual funds tracking indexes has increased the correlation among stocks, ...
  2. What are common delta hedging strategies?

    Learn about common delta hedging strategies, including how to make a position in options delta neutral by offsetting risk ...
  3. How does being overweight in a particular sector increase risk to a portfolio?

    Learn about the risks of having a portfolio that is overweight in a particular sector and how investors should regularly ...
  4. What are the primary risks an investor should consider when investing in the retail ...

    Learn about the primary risks of investing in the retail sector, such as bad economic conditions, regulation, competition ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!