life insurance

Definition

Insurance cover that serves two major purposes: (1) to substitute for the insured's income if he or she dies, and (2) to qualify the insured for favorable tax treatment. The policy holders buy insurance cover from an insurance company, and pay specific periodic amounts (premiums) for the term (duration or life) of the policy. If the insured dies before the this term is completed, a guaranteed sum (the face amount of the policy) is paid to one or more named beneficiaries. If the insured survives the term then, depending on the type of the policy, he or she may receive the full or a part of the face amount of the policy. For young families, a life insurance policy creates an 'instant estate' before they have enough time to accumulate other assets. And it provides liquidity to the named beneficiary (or beneficiaries) long before the deceased's estate matters (which often call for substantial expense) are settled. Four main types of life insurance policies are (1) Term life insurance, (2) Whole life insurance, (3) Endowment life policy, and (4) Annuity. Life insurance has its origins in the old practice of saving money for one's own funeral costs, and is called also life assurance.