A Life Insurance Plan Constitutes A Contract Entered into By The Insurance Company And The Planholder
Life insurance is a contract entered into between the insured who is also called policyholder and an insurance company. The contract is in essence an undertaking by the insurance company to pay the insured sum of money in the event of death or critical illness.
To start the contract the policyholder either makes a single payment on commencement or agrees to pay a sum of money to the insurance company reguarly for a stated period of time. In either case the money paid is known as the policy premium. In several countries life insurance also means providing for the payment of funeral expenses in addition to the payout of the sum assured. But in countries such as the United States policy payouts are normally simply for the sum assured on the death of the insured.
The sum assured is usually paid to the beneficiaries of the insured in the case of the death of the insured and thus the policyholder gets peace of mind in knowing that the nominated beneficiaries are going to be taken care of in the event of his or her death.
While in some cases the sum assured is paid out in advance of death where the planholder is diagnosed with an illness that is serious in nature, to keep the liability of the insurer within workable limits, cases like serious injury or death arising out of war, riot, some natural disasters and death from suicide are not covered.
Life insurance policies come various forms and can offer not just protection but also serve as an investment vehicle. For instance, a lot of term life insurance plans are intended purely to provide protection for a set period of time and will only pay out if death or serious illness occurs during the specific term. If these events do not occur then the policy simply lapses having no value.
By contrast, many whole life insurance and universal life plans stay in force throughout the planholder’s life and pay out on the onset of critical illness or death. They do however also gain a cash value that is based on the value of the investment supporting the policy and the policyholder is allowed to take some or all of this value from the policy in accordance with the terms of the contract. This form of policy is often used as a savings vehicle for things like the payment of school fees or the provision of a lump sum for retirement.
Life insurance is also frequently used in business, especially within partnerships, to protect the business in the event of the death of someone with a financial interest in the business. Here it is normal for one person to purchase a plan and act as both the planholder and beneficiary with another individual being the insured.
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