Life insurance is a contract between a policy holder and a guarantor. The guarantor promises to pay a sum of money upon the eventuality of the death of the insured provided that all terms and conditions of the policy have been upheld. These conditions include the timely payment of policy premiums, honesty in the application process, and can also include health exams of the proposed insured.
The guarantor is the life insurance company who has underwritten the life insurance policy. It is the responsibility of the guarantor to ensure that their potential insured’s are eligible for coverage. Most life insurance companies include clauses for non-payment should the guarantor discover fraud on the part of the owner or insured in applying for the policy, or in the case of suicide. These clauses are usually in effect for the first two years of the policy after which time it is usually deemed that the guarantor has had sufficient time to disprove an insured’s eligibility.
The owner of the life insurance policy and the insured are often the same person, although they don’t have to be. For example, if Sam purchases life insurance coverage for himself, then he is both the owner of the policy and the insured. However, if Sam’s wife buys a life insurance policy covering Sam, then Sam’s wife is the owner of the policy and Sam is the insured. Life insurance policies vary in a variety of ways including coverage amounts, how long the policy is good for, as well as whether or not there is a cash value to the policy.
Insurance companies have acted to limit policy purchases to those with an insurable interest in the proposed insured, when the owner of the policy is not the insured. An insurable interest requirement means that the owner of the policy can demonstrate that they will suffer some sort of financial loss if the insured dies. This requirement is meant to keep people from purchasing policies on other people they expect to die. Close family members and business partners are usually deemed to have an insurable interest.
There are different types of life insurance available for your consideration such as term life insurance and permanent life insurance. Permanent life insurance encompasses whole life and universal life insurance policies. It is important to note the different ways in which these policies work before deciding on which type of policy best suites the needs for you and your loved ones.