A Quick Life Insurance Walk-Through
Written by Dongmiao Cui   


Life insurance hedges against individual’s death or critical illness. It is a contract involving four participants: insurer, policy owner, beneficiary, and insured person. The insurer (the life insurance company) offers the insurance policy, which is purchased by the policy owner (or policy holder). The insurer agrees to pay a certain amount of money to the beneficiary designated by the policy owner, upon the demise of the insured person, who is also chosen by the policy owner. Despite the complexity of the involvement, there are only two parties to the contract -- the insurer and the policy owner (who acquire rights and duties to each other). 

Attention should be paid to the difference between the policy owner and the insured person. They are not necessarily the same thing. The policy owner is the person that pays for the insurance. For example, if you sign a contract on your own life, you can be both the insured and the policy owner. To the contrary, if you buy a contract on your wife/husband’s life, you become the policy owner while she/he is the insured person. 

The cost of insurance is calculated and determined by actuaries based on mortality tables. The three major variables are age, gender and smoking. Once death or terminal illness occurred to the insured person, the insurance company will acquire official proof of death (or the illness) and file a claim form. Proceeds are typically paid in annuity or lump sum over a specified period of time.

For income tax purposes, premiums paid by the policy owner are not deductible and proceeds paid by the insurance company are normally excluded from the gross income.





Last Updated on Sunday, 26 December 2010 20:20