Everybody needs life insurance at some point in their lives and it is only natural for those that are new to the subject to ask 'what is life insurance?' or more specifically 'what is term life insurance?'. On this page we are going to provide you with a life insurance definition and also a definition of other life insurance products such as a term life insurance definition. This is vital information that you will need before heading out into the insurance market and buying one of the many insurance products that are available.
The explanations that we use on this page will be short, simple and free of the industry related jargon that would be faced with if you were to try and find out what life insurance is on one of the many insurance provider's website.
Here is our life insurance definition that we have attempted to keep as short and straight forward as possible.
A life insurance policy is a written contract between an insurance provider and a person who wishes to be insured, they are referred to as the policy owner or policy holder. The insurance company will agree to pay a pre-determined beneficiary a sum of money in the event of the insured person's death during the period that the life insurance policy is in force. It is possible for the insured to be a different person to the policy holder, you can take a life insurance policy out on your own life or on somebody elses as long as their can be a proven reason for doing the latter known as an insurable interest. It is also possible on some life insurance policies for there to be other events that the insurance company will pay out on such as the diagnosis or a critical or terminal illness. When asking 'what is life insurance?' it is vital to remember that there are several types of life insurance policies and these can differ significantly, there is no generic 'life insurance' product.
In order for this insurance to remain in place for a set amount of time, know as a term, or for the rest of their lives, they agree to pay a premium payment to the insurer on a one off or regular basis. For life insurance policies that are designed to pay out only on the death of the insured the benefits of the policy only come in their death, where as some life insurance policies have an investment component where the benefits of the policy can be enjoyed in the insured's life too. A good example of this type of life insurance is universal life insurance.
Life insurance policies are legally binding contracts and their terms and conditions describe the limitations of the insured events. There may be specific exclusions applied to the contract in order to limit the liability of the insurer, such exclusions may include it not being possible to make a claim relating to suicide, fraud or war. This is just a life insurance definition and it is critical to remember that each insurer may provide a variance to their contracts.
When asking 'what is life insurance?' it is also very important to remember that it comes in two main categories which are protection and investment.
These two factors are important when understanding the life insurance definition.
The insurance company will obtain as much information as they can about you in order to assess the risk that you pose to them and this will allow them and their life insurance underwriters to decide the terms of business that they are willing to offer. It is possible that the insurance company will require customers to have medical examinations take place and to obtain as much information from doctors and the customer before they offer any terms of business. They want to do business with everybody but if you pose a high risk due to ill health you are deemed a higher risk and thus will either be declined or expected to pay more to compensate for the risk that you present.
The basic cost of the life insurance is based upon mortality tables which provide costs in relation to an applicant's age, sex and whether they use tobacco products or not. This forms the basic Life Insurance Premium. This should match the premium that you would have been quoted if you chose to get a quote before applying as it does not include any potential inscrease following the life underwriting process.
Here is out simple term life insurance definition that we have provided in a straightforward and jargon free manor to help anybody understand just what it is all about. Term life insurance is arguably the most cost effective and popular type of life insurance on the market so it is very common for people to ask 'what is term life insurance?'
In short a term life insurance definition is provision of insurance over a set period of years, known as the term in exchange for a pre-determined premium payment. You are buying protection agsint the event of your death. However, a more comprehensive and in depth explanation is as follows.
When you are asking yourself 'what is term life insurance?' the most important thing to know is that this is a protection only type of life insurance and there is no investment element to it and thus no cash value at any time. A one off or regular premium is paid to guarantee that a pre-determined sum of money will be paid out in the event of the death of the insured and also potentially the insured being diagnosed with a terminal or critical illness.
A simple term life insurance definition is that it is a short term life insurance policy which provides affordable financial protection against the unexpected event of your death during the term of the policy, this is the time that is is in force. It is possible to take out a term life insurance policy with additional features or riders such as Critical Illness cover but here we are covering the stand alone life cover.
The objective of a term life insurance policy is to pay out a guaranteed lump sum following the death of the insured, or one of the insureds should the contract be written in joint names. This lump sum is pre-determined at the start of the policy and is guaranteed throughout the also pre-determined length of the policy. It is called ' short term' life insurance because it is taken out over a short period of time such as 5,10,15 or 20 year preiods, as opposed to long term life insurance policy such as universal life insurance which runs for life.
Furthermore when asking 'what is term life insurance?' it is important to know that there can only ever be one claim on a policy, once the death benefit has been paid the policy has finished. The sum assured acts as financial security for your loved ones and/or those that are financially dependent upon you or to pay off an outstanding financial liability such as a debt or mortgage. The basic policy will pay out on death only inside the term, however some insurers will also pay out should you be diagnosed with a terminal illness.
A bit of an example for those asking 'what is term life insurance?'. The people who propose the policy, who will be the policy holders or policy owners as they are also known, choose a fixed sum insured and a fixed term or period that the policy will be taken out over, for example $100,000 over a 25 year term, the policy commences June 1 2011 and expires June 11 2036. The length of the term available is usually between 5 and 30 years.
Customers will complete an application with the insurance provider on the internet, over the telephone or if going through a broker in person on a paper form. By applying for life insurance you are entering into a contract with the insurer so in order for the insurer to find out exactly how insurable you are they will need to pose a series of questions which must be answered in complete honesty or to the best of your knowledge. Everybody that applies poses some kind of risk to the insurer and they must find out how much to determine the terms of business that they offer.
The basic cost of the life insurance is based upon mortality tables which provide costs in relation to an applicant's age, sex and whether they use tobacco products or not. This forms the basic Life Insurance Premium. This should match the premium that you were initially quoted before applying as it does not include any potential inscrease following the life underwriting process, an important factor to remember as part of our term life insurance definition.
We hope that you have found our life insurance definition and term life insurance definition useful and informative. It is always important to know what you are buying before you do business with any insurance company.
If you are still asking yourself 'what is life insurance?' or 'what is term life insurance?' then the best thing to do is contact the insurance company directly or speak to a financial adviser or agent as they will be able to provide you with free independent advice. Do not be concerned that a financial adviser will charge you a fortune to do business with them, in almost all cases they will not charge you a dime as the insurance company will pay them commission should you submit your business though them.
If you want some more information on the different types of life insurance policies please see our dedicated website.
We also have some very useful pages on this website such as a full rundown of a term life insurance policy, a guide to life insurance underwriting and also a page to help you find the best life insurance companies to use.