Life Insurance: A Brief Explanation
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (source: Wikipedia). Life insurance means to provide financial security for family after the policy holder die. In some cases, funeral expenses can be included in insurance benefits. Cause of death such as terminal illness or critical illness (natural death) can trigger the payment. The insurer also mention certain exclusions in the contract such as suicide, fraud, war or commotion. These exclusions aims to limit the liability of the insurer.
There are three main components in life insurance contract:
- Death benefit. The insurance company pay amount of money to the insured's beneficiaries upon the death of the insured.
- Premium payment. The insurance company determines the amount of premium mortality cost. Insurers use mortality table to determine a cost, the face amount of a policy is multiplied by the chance that the policy will have to be paid out as a claim (when the insured will die). The insurer remains obligated to pay death benefit as long as the insured pays the premium.
- Cash value. Cash value is more like investment or saving account that can benefit the living insured. Cash value is given to the policy owner upon the cancellation of the contract.
Life insurance have been used to facilitate exploitation and fraud although the application process is not easy. There is possible motive, if the face value is a huge sum, the beneficiaries can murder the insured in order to receive the claim. The larger the claim and more serious the cause of death, the larger and intense the investigation which including police and insurer investigation. However, the insurer can also commit fraud by not paying the benefit to the beneficiaries.
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