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Wednesday, March 09, 2005

Life Insurance

Life insurance policies, including pensions and life annuity policies, provide payments depending on the life or the death of a particular person or persons.

Life insurance policies are issued in two basic types: term life and permanent life.

Term life insurance, in a level term form, requires fixed, regular premiums and pays the death benefit, also called the principle sum, only if the insured dies during the policy's term. There are no cash values built under these policies.

Whole life insurance also requires fixed, regular premiums and pays the death benefit when the insured dies. Because the level premium in the early years of such a policy exceeds the average cost of claims and expenses there are moneys available to be invested. The policy owner has access to these invested amounts via the policy's surrender value. Surrender values are not usually available in the first few years of the policy because of high initial expenses. In this sense a whole-life policy has an investment component. Therefore, whole-life insurance is more expensive than term life.

Documents that may be required for payment on life insurance include a certified, official copy of the death certificate stating that a person died on a particular date. A claim form from the insurance company would also usually be required to be signed by each beneficiary or their representative.

Annuity policies are issued by insurance companies in two ways: deferred and immediate. A deferred annuity, as the name implies, includes a period of premium payment before the normal payments to the beneficiary (usually monthly) commence. If the beneficiary dies during this period, then the accumulated premiums (with or without interest) are paid as a benefit. An immediate annuity requires a single (lump-sum) payment and payments to the beneficiary start immediately.

Under both types of annuity it is possible to include guaranteed periods for payments e.g. 5 or 10 years. Both the commencement of benefit payments and the effect of the death of the annuitant (the beneficiary after payments start) may depend on the survival of another life (lives) or the death of another life (lives). Such annuities are called contingent annuities and are common under pension plans and estate settlements e.g. when the pensioner dies his benefit will continue at 60% of its level to a surviving spouse.

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