What is Life Term Insurance? How does it work?
It is kind of insurance in which the the insured transfers a
risk to the insurer, receiving a policy and paying a premium in
exchange. The risk assumed by the insurer is the risk of death
of the insured.
There are generally three parties in a life insurance
transaction: the insurer, the insured or the owner of the policy
(policyholder) and the beneficiary (person or persons who will
receive the policy proceeds upon the death of the insured).
The life insurance policy is a legal contract specifying the
terms and conditions of the risk assumed. It may be nullified in
cases like if the insured commits suicide within a specified
time for the policy date; any misrepresentation by the owner or
insured on the application; if the insured dies within a period
of say 2 years, the insurer can file a claim or request for
additional information before deciding to to pay or not.
The most common reason to buy a life insurance policy is to
protect the financial interests of the owner of the policy in
the event of the insured's demise.The face amount of the policy
is generally the amount paid when the policy matures i.e when
the insured dies or reaches a specified age or retirement. Rates
charged for life insurance depends on the various factors like
age, any disease the insured has, etc.
The insurance company investigaties about the insured at the
time of giving him a policy and deciding the rate of premium.
This process is called underwriting. The insurer (i.e., life
insurance Company) prices the policies with intent to recover
claims to be paid and administrative costs, and to make a
profit.
The insurance company receives the premiums from the policy
owner and invests them to get interest, which again is used to
invest, pay claims, and finance the insurance company's
operations. Upon the death of the insured, the insurer will
require acceptable proof of death e.g. death certificate, before
paying the claim.
If the insured's death was suspicious and the policy amount
warrants it, the insurer may investigate if there is evidence of
its legal obligation to pay the claim. Proceeds from the policy
may be paid in a lump sum or paid over time as regular recurring
payments for either for the life of a specified person or a
specified time period.
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