Life Assurance vs. Life Insurance
| If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance. |
| Suze Orman |
Although often used interchangeably, the terms “insurance” and “assurance” are technically different in jurisdictions where both terms are used (ex. the U.K). If an event is certain to happen sooner or later (such as death) the term “assurance” is appropriate and if an event might happen such as fire, flood, theft, etc. then “insurance” is the proper term. In the United States, both forms of coverage are called “insurance” for reasons of simplicity in companies selling both products.
Life Assurance
is a promise to pay based on an agreement between an insurance company and a policyholder. The insurer receives regular premium payments in exchange for payment of a lump sum upon the death of the insured person. Payment could also be converted to an annuity in order to help supplement retirement benefits for the beneficiary.
A Life Assurance policy provides protection against financial hardship for loved ones in the event of an insured’s death. Life policies are legal contracts and the terms of the contract are strictly enforced. Policies can be for any amount from enough to cover funeral expenses to multi-million dollar policies. The premium cost is based on a variety of factors including the health and life expectancy of the insured and the overall value of the policy. Specific exclusions can be included in the contract to limit the liability of the insurer; such as excluding pre-existing conditions for an initial period and claims relating to suicide, fraud, war, riot and civil commotion.
Terms:
Policy Owner
The Insured
is the person whose life is covered and payout will be made when he dies. The insured and the policy owner can be the same or different persons. If you buy a policy on your own life, you are both the owner and the insured. But if you buy a policy on someone else’s life, you are just the owner.
The beneficiary
receives policy proceeds upon the insured’s death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. If a policy has an irrevocable beneficiary, any beneficiary changes, policy assignments, or cash value borrowing would require the agreement of the original beneficiary.
Insurable Interest
You can’t take out an assurance policy on just anyone. If the policy owner is not also the insured insurance companies require purchasers to have an insurable interest in the life of the insured. This means that that the purchaser will suffer some kind of loss if the insured dies. By definition, close family members and business partners have an insurable interest. This prevents people from benefiting from the purchase of purely speculative policies on people they expect to die and also prevents encouraging people with no insurable interest to commit murder for the insurance proceeds. In the case of Liberty National Life v. Weldon, an insurance company that sold a policy to a purchaser with no insurable interest (who later murdered the insured for the proceeds), was found liable in court for contributing to the wrongful death of the victim.
Face Amount
The face amount of the policy is the initial amount that the policy will pay at the death of the insured or when the policy matures, although the actual death benefit can provide for greater or lesser than the face amount. The policy matures when the insured dies or reaches a specified age (such as 100 years old).
Exclusions
Some causes of death may be excluded to protect the assurance company from fraud but often it is limited to a contestability period, often two years.
Contestability Period
a period in which the company can refund the premiums paid instead of paying the claim for just cause. Some reasons for contesting the claim would be fraud or suicide since that would be an event under the control of the insured. Any misrepresentations by the insured on the application may also be grounds for nullification.
Death proceeds
Upon the insured’s death, the insurer requires acceptable proof of death before it pays the claim. The normal minimum proof required is a death certificate, and the insurer’s claim form completed, signed and possibly notarized. If the insured’s death is suspicious and the policy amount is large, the insurer may investigate the circumstances surrounding the death before deciding whether it has an obligation to pay the claim.
Payment from the policy may be as a lump sum or as an annuity, which is paid in regular installments for either a specified period or for the beneficiary’s lifetime.
Image courtesy of Simon Howden / FreeDigitalPhotos.net
This article uses material from the Wikipedia article Life Insurance, which is released under the Creative Commons Attribution-Share-Alike License 3.0.