What is Life Insurance and How Does It Work

This is the second article in a series helping people understand the concepts behind insurance and all the different types of life and health insurance you can apply for. “What is Life Insurance” will give you a solid understanding of how a life insurance contract works, how premiums are paid, and how a claim is made upon death. Please check out the master article, What is Insurance, to link to all other articles in the “What Is” series.

Defenition of What is Life Insurance

The basic concept of life insurance is a contract between a life insurance company and a person or business (the insured) with a promise to pay a certain amount of money if the insured was to die. In exchange for that promise to pay a large amount of money upon death, the insured agrees to pay a smaller and regular premium to the insurance company (usually monthly or annual premiums).

A life insurance contract is called a policy, which defines the terms and conditions of the life insurance contract. There are three main types of life insurance contracts, term life insurance, universal life insurance and whole life insurance. Each type is explained in its own “what is” article or you can link over the main pages on the different products in the Life Guard website.

The Purpose of Life Insurance

What is life insurance and why do people buy it? Life insurance gives people peace of mind knowing that if they were to pass away they would not leave financial hardship on their loved ones or business interests. You also have to look at what you are insuring against to determine if it is a temporary risk or a permanent financial hardship to protect against. Temporary risks, like paying off a mortgage, the cost of raising children, a business loan, etc. can be offset with term life insurance. Permanent risks would be things like capital gains taxes from the Canada Revenue Agency, leaving a legacy or inheritance to the next generation, providing funds for a family trust, etc. Permanent risks need permanent life insurance.

It is important to know the type of need you have so you buy the correct type of life insurance. Term life insurance should be purchased with a time frame a close as possible to the time of the risk. For example if you have a 25 year mortgage that you are quick paying, you can get a 20 year term insurance policy which should coincide with your mortgage payoff plan. A permanent life insurance policy can be designed to be smaller while you are younger and increase with age. This should parallel your increasing level of asset accumulation and estate costs (taxes, probate, fees and other costs). Permanent life insurance is also one of the most cost effective ways of creating wealth at the end of life. Plans that have guaranteed amounts of coverage and growing benefits very often perform better than stock markets for long-term growth performance and the payouts for life insurance in Canada are always tax free.

Specific exclusions and limitations to a life insurance policy

When a life insurance policy is issued there are some very standard exclusions where the insurance company will not pay a death benefit. These exclusions are fairly standard in Canada and include:

• Death from suicide within the first two years of the issue date of the life insurance policy
• Death while committing a criminal offence.
• Death while in a war zone (declared war or undeclared war zone like a revolution or police action).
• Fraudulent statement of facts on the insurance application (basically lying about your health or other relevant information to an insurance company).
• Misrepresentation of facts on the insurance application within the first two years of the issue date of the policy. This means that there might be important information that you, the insured, was not aware of during the application process. The insurance company has only two years from the date of issuing a policy to complete all investigations regarding your insurability. Once the policy is older than two years, they cannot decline a claim based on misrepresentation of fact.

When an insurance company investigates a claim it is the responsibility of the insurance company to be able to prove fraud or misrepresentation when denying a claim. It the beneficiaries claiming the death benefit are not required to defend a claim and produce proof against any allegations the insurance company might make. If an insurance company cannot prove fraud or misrepresentation within a reasonable time frame, the courts will award the benefit to the beneficiaries claiming the insurance.

What is Life Insurance – find out more from Life Guard Insurance

Taking the next step to understand what is life insurance and how it might fit into your financial plan is easy. Feel free to contact Life Guard Insurance to answer the question “what is life insurance” for your unique situation.

The article was written by Mitch Reynolds+. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article, What is Life Insurance, would also be very much appreciated.

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4. Insurance Advice: People in Canada are Severly Under-Insured
5. Types of Life Insurance: Term vs. Permanent Life Insurance