Life Insurance - Essay Example

Risk Management and Insurance Life insurance is very important to many people, but the majority of them may lack enough knowledge of how life insurance contract entails. This paper will focus on basic features of life insurance and what life insurance policy owners need to know about it. The basic features of a life insurance contract and their purpose Life insurance is an agreement (contract) between the insured and the insurer. The insurer commits and promises to pay benefits to a specified beneficiary upon the death of the insured (Gitman & Joehnk, 2008). The policy owner is thus required to pay a premium either as a whole or regularly. Life insurance has an advantage in that the insured is assured of financial security of their beneficiary even after their death. According to the policy, if the policy owner fails to make premium payments, the contract ends 30 days after payment was due. In this case, the insured gets nothing (Gitman & Joehnk, 2008). Life insurance policy requires the policy owner to provide truthful information. Sometimes the insurer may fail to pay the claim if they discover that the policy owner provided inaccurate information. Definitions of insured, the owner, and the beneficiary The policy owner is different from the insured, although in some instances, the policy owner is the insured. The policy owner is the person who pays for the premium while the insured is the person covered by the policy. If for example John pays premiums for his own life insurance policy, John in this case is the policy owner and the insured. On the other hand, if John pays premiums for his son, the son in this case is the insured and John is the policy owner. Beneficiary is the designated or the specified person who receives benefits after the insured death. However, beneficiary is not part of the contract. For example, if John pays for premiums of his life policy and designates his son as the person to receive benefits after his death, the son in this case is the beneficiary. Beneficiaries can not conduct any transactions on behalf of the insured or the policy owner (Gitman & Joehnk, 2008). Insured’s rights when ending a cash value life insurance policy Other than through withdrawals and policy loans as ways of accessing cash accumulations, the insured can as well surrender the policy (Hamilton, 2009). When one surrenders (ends) policy, it means that he/she has the right to access cash accumulations and utilize the money in the way he/she sees fit. However, in case the insured ends the cash value policy, during early years of the policy, the policy owner is likely to be charged by the company thus reducing their cash value (Hamilton, 2009). The effect of an insured’s suicide on the insurer’s duty to pay proceeds To begin with, life insurance is not designed to cover the acts of people taking their own lives. According to the suicide clause contained in the life insurance policy, if the insurer discovers that the insured committed suicide within a prescribed period of time, which is defined or determined by the policy agreement, the insurer can decide to decline to honor the claim (Hamilton, 2009). In fact, it is argued that insurance is intended to cover accidental events. Therefore, to prevent people from committing suicide with the intent of benefiting their beneficiaries from the claim, the insurance includes suicide clause in the contact. The presumption of the clause is that people with intentions to taking away their lives can not wait for two years. However, if the insured commits suicide after the specified period, the insurer must pay the claim. In most cases, the specified time is two years (Gitman & Joehnk, 2008). Nevertheless, even in times when the insured commits suicide within the specified period and the beneficiaries disagree with suicidal allegations, there is a big battle between the beneficiaries and the insurance company as they try to prove their case. Description of the insured’s right to borrow a policy’s cash value When insured’s premium payments exceed the cost of insurance, the excess goes to cash value account and it’s subject to draw interest (Hamilton, 2009). However, the actual amount depends on the policy face amount, the length of the premium payment period, the duration the policy owner have owned the policy, and whether the policy owner has any outstanding policy loan. If the policy owner has a cash value, he/she can cancel the policy and request surrender of the cash value. In some instances, the policy owner can stop paying for policy and use the cash value to service the policy. However, the policy owner can also withdraw part of the cash value inform of a policy loan (Hamilton, 2009). Usually, the policy owner pays back the loan with interest lower than a bank loan. However, the policy owners are not obliged to pay the loan back, but the money they owe, plus the interest is normally deducted from the death benefit when they die (Gitman & Joehnk, 2008). Policy owners can make a full or partial withdrawal of their cash value. Different ways a beneficiary may take proceeds after the insured’s death After the death of the insured, beneficiaries may gather documents needed to file the claim. If they know the insurance company, they may contact to get claim forms. Some insurance companies have websites where beneficiaries can find claim forms (Gitman & Joehnk, 2008). Alternatively, beneficiaries can contact the broker who handled the deceased accounts. On the other hand, beneficiaries may contact the deceased employer to find out whether the company provided group life insurance. Still, beneficiaries can contact deceased lawyer to seek help. However, beneficiaries need to have a copy of death certificate and some other documents the insurance company may require. Extra-cost options and why some are more valuable than others Different insurance companies have got different lifestyle requirements available to people intending to buy a life insurance policy. Some of the factors they consider include gender, age, state of health, and to some extent occupation (Hamilton, 2009). For example, it is argued that men do not live as long as women do, so they characteristically pay 30% more for their life insurance (Gitman & Joehnk, 2008). Another issue is that some companies may offer life policy to persons with the poor state of health while others do not. For those that offer, they might charge the premiums slightly higher than the normal rates. For example, a person who smokes is charged a bit higher on his premiums than a non smoker. References: Gitman, L. & Joehnk, M. (2008). Personal financial planning. Mason, OH: Thomson/South- Western. Hamilton, J. (2009). Misrepresentation in the life, health, and disability insurance application process: a national survey. Chicago, Ill.: Tort Trial & Insurance Practice Section, ABA. Read More