Saturday, April 2, 2011

Life Insurance

life insurance is a method by which numbers of individuals pool their funds so as to spread the risk of financial loss from death equally among them. Historically, the practice of life insurance dates back at least as far as the romans whose burial clubs financed funeral expenses and made payments to families of the deceased.

Type of Life Insurance
The tree basic types of life insurance contracts are term, whole life, and endowment. A related type is the annuity.

Term of Insurance
The simplest type of policy is term insurance, in which the policyholder buys protection only for the period of the contract, which may run from 1 to 20 years or more. Term insurance provides maximum protection for a minimum outlay at a given time. If the insured person dies within the period of the contract, the face value of the policy is paid to a beneficiary. The premium, or cost, of the term policy increased with the age of the insured.

Whole Life Insurance
A policy that is brought to cover the whole lifetime of the insured is called whole life, straight life, or ordinary life insurance. The younger the age when a person takes out a policy, the lower the rate of premium. This premium remains constant, since it is based on the expectation that the policy will be held for the person's lifetime. In early years the premium paid by the policy will be held for the person's lifetime. In early years the premium paid by the policy the policyholder is more than the true cost of the insurance (the financial risk to the insurance company of a policyholder's death is more than covered by the premium rate), but in later years it is less. Thus in early years the policy builds up a cash value accruing from the difference between the premium paid in and the true cost of the insurance. The insured person can capture this cash value by borrowing on it or by discontinuing the policy and getting a refund. Since insurance companies invest the premiums paid in, they are required to guarantee the policyholder a certain rate of interest on the cash value; for this reason, whole life insurance requires lower cash outlay than other types of policies over a person's lifetime.

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