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Life Insurance is a contract between a policy holder and an insurer by which the insurer agrees to pay a sum of money upon the death of an individual. The policy holder, in return, agrees to pay make payments to the insurer, either in regular intervals or in a lump sum. Most commonly, the life insured is that of the policy holder, although it is not uncommon for businesses to hold life insurance policies on owners or managers. Upon the death of the insured, payments are made to predesignated beneficiaries.

The most common types of life insurance are temporary (term) and permanent (whole life). Temporary life insurance insures an individual's life for a set amount of time. Payments for temporary life insurance tend to be low in relation to the size of the policy. However, the policy is worth nothing after it expires. Permanent life insurance insures an individual for life. With permanent life insurance, payments gradually accrue interest, growing over time. It tends to be very expensive, since it does not expire and an eventual payment is guaranteed. It is also possible for policy holders to access capital held in the account by withdrawing money, using the account as collateral for a loan, or terminating the policy.

It is common for employees of a company to purchase group life insurance. Rather than examining individuals for insurability, a group insurance premium is calculated based on the size of the group, the average turnover, and the financial strength of the group.


Article contributors

Andrew Birch - University of Vermont

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Catgories: Death and disability