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Life insurance (or life assurance, especially in the
Commonwealth of Nations The Commonwealth of Nations, simply referred to as the Commonwealth, is a political association of 56 member states, the vast majority of which are former territories of the British Empire. The chief institutions of the organisation are the C ...

Commonwealth of Nations
) is a
contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, Service (economics), ser ...

contract
between an
insurance policy In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the policyholder, which determines the claim (legal), claims which the insurer is law, legally required to pay. In exchange for an initial ...
holder and an insurer or assurer, where the insurer promises to pay a designated
beneficiary A beneficiary (also, in trust law, ''cestui que use'') in the broadest sense is a natural person or other legal entity who receives money or other employee benefit, benefits from a benefactor (law), benefactor. For example, the beneficiary of a lif ...
a sum of money upon the
death Death is the Irreversible process, irreversible cessation of all biological process, biological functions that sustain an organism. For organisms with a brain, death can also be defined as the irreversible cessation of functioning of the whol ...

death
of an insured person (often the policyholder). Depending on the contract, other events such as
terminal illness Terminal illness or end-stage disease is a disease that cannot be cured or adequately treated and is expected to result in the death of the patient. This term is more commonly used for progressive diseases such as cancer, dementia or advanced he ...
or critical illness can also trigger payment. The policyholder typically pays a premium, either regularly or as one lump sum. The benefits may include other expenses, such as funeral expenses. Life policies are legal contracts and the terms of each contract describe the limitations of the insured events. Often, specific exclusions written into the contract limit the liability of the insurer; common examples include claims relating to
suicide Suicide is the act of intentionally causing one's own death Death is the Irreversible process, irreversible cessation of all biological process, biological functions that sustain an organism. For organisms with a brain, death can also ...

suicide
, fraud, war, riot, and civil commotion. Difficulties may arise where an event is not clearly defined, for example, the insured knowingly incurred a risk by consenting to an experimental medical procedure or by taking medication resulting in injury or death. Modern life insurance bears some similarity to the asset-management industry, and life insurers have diversified their product offerings into retirement products such as annuities. Life-based contracts tend to fall into two major categories: * Protection policies: designed to provide a benefit, typically a lump-sum payment, in the event of a specified occurrence. A common form of a protection-policy design is term insurance. *
Investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

Investment
policies: the main objective of these policies is to facilitate the growth of capital by regular or single premiums. Common forms (in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
) are whole life, universal life, and variable life policies.


History

An early form of life insurance dates to
Ancient Rome In modern historiography, ancient Rome refers to Roman civilisation from the founding of the city of Rome in the 8th century BC to the collapse of the Western Roman Empire in the 5th century AD. It encompasses the Roman Kingdom (753–509 ...
; "burial clubs" covered the cost of members' funeral expenses and assisted survivors financially. In 1816, an archeological excavation in Minya, Egypt (under an
Eyalet Eyalets (Ottoman Turkish: ایالت, , English: State), also known as beylerbeyliks or pashaliks, were a primary administrative division of the Ottoman Empire. From Fall of Constantinople, 1453 to the beginning of the nineteenth century the O ...
of the
Ottoman Empire The Ottoman Empire, * ; is an archaic version. The definite article forms and were synonymous * and el, Оθωμανική Αυτοκρατορία, Othōmanikē Avtokratoria, label=none * info page on book at Martin Luther University) ...

Ottoman Empire
) produced a
Nerva–Antonine dynasty The Nerva–Antonine dynasty comprised 7 Roman emperors who ruled from 96 to 192 AD: Nerva (96–98), Trajan (98–117), Hadrian (117–138), Antoninus Pius (138–161), Marcus Aurelius (161–180), Lucius Verus (161–169), and Commodus (180– ...
-era tablet from the ruins of the Temple of Antinous in Antinoöpolis,
Aegyptus
Aegyptus
that
prescribed the rules
prescribed the rules
and membership dues of a
burial society A burial society is a type of benefit society, benefit/friendly society. These groups historically existed in England and elsewhere, and were constituted for the purpose of providing by voluntary subscriptions for the funeral expenses of the husband ...
''
collegium A (plural ), or college, was any association in ancient Rome that Corporation, acted as a Legal person, legal entity. Following the passage of the ''Lex Julia'' during the reign of Julius Caesar as Roman consul, Consul and Roman dictator, Dic ...
'' established in
Lanuvium Lanuvium, modern Lanuvio, is an ancient city of Latium vetus, some southeast of Rome, a little southwest of the Via Appia. Situated on an isolated hill projecting south from the main mass of the Alban Hills, Lanuvium commanded an extensive view ...
,
Italia Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the Italy (geographical region) ...

Italia
in approximately 133 AD during the reign of
Hadrian Hadrian (; la, Caesar Trâiānus Hadriānus ; 24 January 76 – 10 July 138) was Roman emperor from 117 to 138. He was born in Italica (close to modern Santiponce in Spain), a Roman ''municipium'' founded by Italic peoples, Italic settlers ...

Hadrian
(117–138) of the
Roman Empire The Roman Empire ( la, Imperium Romanum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post-Roman Republic, Republican period of ancient Rome. As a polity, it included large territorial holdings aro ...

Roman Empire
. In 1851, future
U.S. Supreme Court
U.S. Supreme Court
Associate Justice Associate justice or associate judge (or simply associate) is a judicial panel member who is not the Chief Justice, chief justice in some jurisdictions. The title "Associate Justice" is used for members of the Supreme Court of the United States ...
Joseph P. Bradley (1870–1892), once employed as an
actuary An actuary is a business professional who deals with the measurement and management of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with resp ...
for the Mutual Benefit Life Insurance Company, submitted an article to the '' Journal of the Institute of Actuaries'' detailing an historical account of a
Severan dynasty The Severan dynasty was a Ancient Rome, Roman imperial dynasty that ruled the Roman Empire between 193 and 235, during the Roman imperial period (chronology), Roman imperial period. The dynasty was founded by the emperor Septimius Severus (), w ...
-era life table compiled by the Roman jurist
Ulpian Ulpian (; la, Gnaeus Domitius Annius Ulpianus; c. 170223? 228?) was a Roman empire, Roman jurist born in Tyre (Lebanon), Tyre. He was considered one of the great legal authorities of his time and was one of the five jurists upon whom decisions w ...

Ulpian
in approximately 220 AD during the reign of
Elagabalus Marcus Aurelius Antoninus (born Sextus Varius Avitus Bassianus, 204 – 11/12 March 222), better known by his nickname "Elagabalus" (, ), was Roman emperor from 218 to 222, while he was still a teenager. His short reign was conspicuous for se ...
(218–222) that was included in the '' Digesta seu Pandectae'' (533) codification ordered by
Justinian I Justinian I (; la, Flavius Petrus Sabbatius Iustinianus, ; grc-gre, Ἰουστινιανός ; 48214 November 565), also known as Justinian the Great, was the Byzantine emperor, Eastern Roman emperor from 527 to 565. His reign is marked by ...
(527–565) of the
Eastern Roman Empire The Byzantine Empire, also referred to as the Eastern Roman Empire or Byzantium, was the continuation of the Roman Empire The Roman Empire ( la, Imperium Romanum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn R ...

Eastern Roman Empire
. The earliest known life insurance policy was made in Royal Exchange, London on 18 June 1583. A Richard Martin insured a William Gybbons, paying thirteen merchants 30 pounds for 400 if the insured dies within one year. The first company to offer life insurance in modern times was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen.Anzovin, Steven, ''Famous First Facts'' 2000, item # 2422, H. W. Wilson Company, p. 121 ''The first life insurance company known of record was founded in 1706 by the Bishop of Oxford and the financier Thomas Allen in London, England. The company, called the Amicable Society for a Perpetual Assurance Office, collected annual premiums from policyholders and paid the nominees of deceased members from a common fund.'' Each member made an annual payment per share on one to three shares with consideration to age of the members being twelve to fifty-five. At the end of the year a portion of the "amicable contribution" was divided among the wives and children of deceased members, in proportion to the number of shares the heirs owned. The Amicable Society started with 2000 members. The first life table was written by
Edmund Halley Edmond (or Edmund) Halley (; – ) was an English astronomer, mathematician and physicist. He was the second Astronomer Royal in Britain, succeeding John Flamsteed in 1720. From an observatory he constructed on Saint Helena in 1676–77, Hal ...

Edmund Halley
in 1693, but it was only in the 1750s that the necessary mathematical and statistical tools were in place for the development of modern life insurance. James Dodson, a
mathematician A mathematician is someone who uses an extensive knowledge of mathematics in their work, typically to solve mathematical problems. Mathematicians are concerned with numbers, data, quantity, mathematical structure, structure, space, Mathematica ...

mathematician
and actuary, tried to establish a new company aimed at correctly offsetting the risks of long-term life assurance policies, after being refused admission to the Amicable Life Assurance Society because of his advanced age. He was unsuccessful in his attempts at procuring a charter from the
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government ...
. His disciple,
Edward Rowe Mores
Edward Rowe Mores
, was able to establish the Society for Equitable Assurances on Lives and Survivorship in 1762. It was the world's first mutual insurer and it pioneered age based premiums based on
mortality rate Mortality rate, or death rate, is a measure of the number of deaths (in general, or due to a specific cause) in a particular Statistical population, population, scaled to the size of that population, per unit of time. Mortality rate is typically ...
laying "the framework for scientific insurance practice and development" and “the basis of modern life assurance upon which all life assurance schemes were subsequently based”. Mores also gave the name
actuary An actuary is a business professional who deals with the measurement and management of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with resp ...
to the chief official—the earliest known reference to the position as a business concern. The first modern actuary was William Morgan, who served from 1775 to 1830. In 1776 the Society carried out the first actuarial valuation of liabilities and subsequently distributed the first reversionary bonus (1781) and interim bonus (1809) among its members. It also used regular valuations to balance competing interests. The Society sought to treat its members equitably and the Directors tried to ensure that policyholders received a fair return on their investments. Premiums were regulated according to age, and anybody could be admitted regardless of their state of health and other circumstances. The sale of life insurance in the U.S. began in the 1760s. The
Presbyterian Presbyterianism is a part of the Reformed tradition within Protestantism that broke from the Roman Catholic Church in Scotland by John Knox, who was a priest at St. Giles Cathedral (Church of Scotland). Presbyterian churches derive their nam ...
Synods in
Philadelphia Philadelphia, often called Philly, is the List of municipalities in Pennsylvania#Municipalities, largest city in the Commonwealth (U.S. state), Commonwealth of Pennsylvania, the List of United States cities by population, sixth-largest city i ...
and
New York City New York, often called New York City or NYC, is the List of United States cities by population, most populous city in the United States. With a 2020 population of 8,804,190 distributed over , New York City is also the L ...
created the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian priests organized a similar fund in 1769. Between 1787 and 1837 more than two dozen life insurance companies were started, but fewer than half a dozen survived. In the 1870s, military officers banded together to found both the Army ( AAFMAA) and the Navy Mutual Aid Association (Navy Mutual), inspired by the plight of widows and orphans left stranded in the West after the
Battle of the Little Big Horn The Battle of the Little Bighorn, known to the Lakota people, Lakota and other Plains Indians as the Battle of the Greasy Grass, and also commonly referred to as Custer's Last Stand, was an armed engagement between combined forces of the Lako ...
, and of the families of U.S. sailors who died at sea.


Overview


Parties to contract

The person responsible for making payments for a policy is the policy owner, while the insured is the person whose death will trigger payment of the death benefit. The owner and insured may or may not be the same person. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured. The policy owner is the guarantor and they will be the person to pay for the policy. The insured is a participant in the contract, but not necessarily a party to it. The beneficiary receives policy proceeds upon the insured person's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. If a policy has an irrevocable beneficiary, any beneficiary changes, policy assignments, or cash value borrowing would require the agreement of the original beneficiary. In cases where the policy owner is not the insured (also referred to as the ''celui qui vit'' or CQV), insurance companies have sought to limit policy purchases to those with an
insurable interest Insurable interest exists when an Insurance, insured person derives a financial or other kind of benefit from the continuous existence, without repairment or damage, of the insured object (or in the case of a person, their continued survival). A pe ...
in the CQV. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The insurable interest requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies on people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least one case, an insurance company that sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful death of the victim (''Liberty National Life v. Weldon'', 267 Ala.171 (1957)).


Contract terms

Special exclusions may apply, such as suicide clauses, whereby the policy becomes null and void if the insured dies by
suicide Suicide is the act of intentionally causing one's own death Death is the Irreversible process, irreversible cessation of all biological process, biological functions that sustain an organism. For organisms with a brain, death can also ...

suicide
within a specified time (usually two years after the purchase date; some states provide a statutory one-year suicide clause). Any misrepresentations by the insured on the application may also be grounds for nullification. Most US states, for example, specify a maximum contestability period, often no more than two years. Only if the insured dies within this period will the insurer have a legal right to contest the claim on the basis of misrepresentation and request additional information before deciding whether to pay or deny the claim. The face amount of the policy is the initial amount that the policy will pay at the death of the insured or when the policy matures, although the actual death benefit can provide for greater or lesser than the face amount. The policy matures when the insured dies or reaches a specified age (such as 100 years old).


Costs, insurability, and underwriting

The insurance company calculates the policy prices (premiums) at a level sufficient to fund claims, cover administrative costs, and provide a profit. The cost of insurance is determined using mortality tables calculated by actuaries. Mortality tables are statistically based tables showing expected annual mortality rates of people at different ages. As people are more likely to die as they get older, the mortality tables enable insurance companies to calculate the risk and increase premiums with age accordingly. Such estimates can be important in taxation regulation. In the 1980s and 1990s, the SOA 1975-80 Basic Select & Ultimate tables were the typical reference points, while the 2001 VBT and 2001 CSO tables were published more recently. As well as the basic parameters of age and gender, the newer tables include separate mortality tables for and non-smokers, and the CSO tables include separate tables for preferred classes. The mortality tables provide a baseline for the cost of insurance, but the health and family history of the individual applicant is also taken into account (except in the case of Group policies). This investigation and resulting evaluation is termed
underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabil ...
.
Health Health, according to the World Health Organization, is "a state of complete physical, Mental health, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World H ...
and lifestyle questions are asked, with certain responses possibly meriting further investigation. Specific factors that may be considered by underwriters include: * Personal medical history; * Family medical history; * Driving record;Rothstein, 2004, p. 65. * Height and weight matrix, otherwise known as BMI (
Body Mass Index Body mass index (BMI) is a value derived from the mass (Mass versus weight, weight) and height of a person. The BMI is defined as the human body weight, body mass divided by the square (algebra), square of the human height, body height, and is ...

Body Mass Index
). Based on the above and additional factors, applicants will be placed into one of several classes of health ratings which will determine the premium paid in exchange for insurance at that particular carrier. Life insurance companies in the United States support the Medical Information Bureau (MIB), which is a clearing house of information on persons who have applied for life insurance with participating companies in the last seven years. As part of the application, the insurer often requires the applicant's permission to obtain information from their physicians. Automated Life Underwriting is a technology solution which is designed to perform all or some of the screening functions traditionally completed by underwriters, and thus seeks to reduce the work effort, time and/or data necessary to underwrite a life insurance application. These systems allow point of sale distribution and can shorten the time frame for issuance from weeks or even months to hours or minutes, depending on the amount of insurance being purchased. The mortality of underwritten persons rises much more quickly than the general population. At the end of 10 years, the mortality of that 25-year-old, non-smoking male is 0.66/1000/year. Consequently, in a group of one thousand 25-year-old males with a $100,000 policy, all of average health, a life insurance company would have to collect approximately $50 a year from each participant to cover the relatively few expected claims. (0.35 to 0.66 expected deaths in each year × $100,000 payout per death = $35 per policy.) Other costs, such as administrative and sales expenses, also need to be considered when setting the premiums. A 10-year policy for a 25-year-old non-smoking male with preferred medical history may get offers as low as $90 per year for a $100,000 policy in the competitive US life insurance market. Most of the revenue received by insurance companies consists of premiums, but revenue from investing the premiums forms an important source of profit for most life insurance companies. Group insurance policies are an exception to this. In the United States, life insurance companies are never legally required to provide coverage to everyone, with the exception of Civil Rights Act compliance requirements. Insurance companies alone determine insurability, and some people are deemed uninsurable. The policy can be declined or rated (increasing the premium amount to compensate for the higher risk), and the amount of the premium will be proportional to the face value of the policy. Many companies separate applicants into four general categories. These categories are ''preferred best'', ''preferred'', ''standard'', and ''tobacco''. Preferred best is reserved only for the healthiest individuals in the general population. This may mean, that the proposed insured has no adverse medical history, is not under medication, and has no family history of early-onset
cancer Cancer is a group of diseases involving Cell growth#Disorders, abnormal cell growth with the potential to Invasion (cancer), invade or Metastasis, spread to other parts of the body. These contrast with benign tumors, which do not spread. Poss ...
,
diabetes Diabetes, also known as diabetes mellitus, is a group of metabolic disorders characterized by a high blood sugar level ( hyperglycemia) over a prolonged period of time. Symptoms often include frequent urination, increased thirst and increase ...
, or other conditions. Preferred means that the proposed insured is currently under medication and has a family history of particular illnesses. Most people are in the standard category. People in the tobacco category typically have to pay higher premiums due to higher mortality. Recent US mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 will die during the first year of a policy.Actuary.org
Mortality approximately doubles for every additional ten years of age, so the mortality rate in the first year for non-smoking men is about 2.5 in 1,000 people at age 65. Compare this with the US population male mortality rates of 1.3 per 1,000 at age 25 and 19.3 at age 65 (without regard to health or smoking status).


Death benefits

Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim. If the insured's death is suspicious and the policy amount is large, the insurer may investigate the circumstances surrounding the death before deciding whether it has an obligation to pay the claim. Payment from the policy may be as a lump sum or as an annuity, which is paid in regular installments for either a specified period or for the beneficiary's lifetime.


Insurance vs assurance

The specific uses of the terms "insurance" and "assurance" are sometimes confused. In general, in jurisdictions where both terms are used, "insurance" refers to providing coverage for an event that ''might'' happen (fire, theft, flood, etc.), while "assurance" is the provision of coverage for an event that is ''certain'' to happen. In the United States, both forms of coverage are called "insurance" for reasons of simplicity in companies selling both products. By some definitions, "insurance" is any coverage that determines benefits based on actual losses whereas "assurance" is coverage with predetermined benefits irrespective of the losses incurred. Life insurance may be divided into two basic classes: temporary and permanent; or the following subclasses: term, universal, whole life, and endowment life insurance.


Term insurance

Term assurance provides life insurance coverage for a specified term (usually 10-30 years). The policy does not accumulate cash value and is significantly less expensive than a permanent policy with an equivalent death benefit but will increase in cost with age. Policyholders can save to provide for increased term premiums or decrease insurance needs (by paying off debts or saving to provide for survivor needs). '' Mortgage life insurance'' insures a loan secured by real property and usually features a level premium amount for a declining policy face value because what is insured is the principal and interest outstanding on a mortgage that is constantly being reduced by mortgage payments. The face amount of the policy is always the amount of the principal and interest outstanding that are paid should the applicant die before the final installment is paid.


Group life insurance

''Group life insurance'' (also known as ''wholesale life insurance'' or ''institutional life insurance'') is term insurance covering a group of people, usually employees of a company, members of a union or association, or members of a pension or
superannuation A pension (, from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) aroun ...
fund. Individual proof of insurability is not normally a consideration in its underwriting. Rather, the underwriter considers the size, turnover, and financial strength of the group. Contract provisions will attempt to exclude the possibility of
adverse selection In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beha ...
. Group life insurance often allows members exiting the group to maintain their coverage by buying individual coverage. The underwriting is carried out for the whole group instead of individuals.


Permanent life insurance

''Permanent life insurance'' is life insurance that covers the remaining lifetime of the insured. A permanent insurance policy accumulates a cash value up to its date of maturation. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value. The three basic types of permanent insurance are ''whole life'', ''universal life'', and ''endowment''.


Whole life

Whole life insurance provides lifetime coverage for a set premium amount.


Universal life coverage

Universal life insurance (ULl) is a relatively new insurance product, intended to combine permanent insurance coverage with greater flexibility in premium payments, along with the potential for greater growth of cash values. There are several types of universal life insurance policies, including ''interest-sensitive'' (also known as "traditional fixed universal life insurance"), ''variable universal life (VUL)'', ''guaranteed death benefit'', and has ''equity-indexed universal life insurance''. Universal life insurance policies have cash values. Paid-in premiums increase their cash values; administrative and other costs reduce their cash values. Universal life insurance addresses the perceived disadvantages of whole life—namely that premiums and death benefits are fixed. With universal life, both the premiums and death benefit are flexible. With the exception of guaranteed-death-benefit universal life policies, universal life policies trade their greater flexibility for fewer guarantees. "Flexible death benefit" means the policy owner can choose to decrease the death benefit. The death benefit can also be increased by the policy owner, usually requiring new underwriting. Another feature of flexible death benefit is the ability to choose option A or option B death benefits and to change those options over the course of the life of the insured. Option A is often referred to as a "level death benefit"; death benefits remain level for the life of the insured, and premiums are lower than policies with Option B death benefits, which pay the policy's cash value—i.e., a face amount plus earnings/interest. If the cash value grows over time, the death benefits do too. If the cash value declines, the death benefit also declines. Option B policies normally feature higher premiums than option A policies.


Endowments

The endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its 'maturity') or on death. Typical maturities are ten, fifteen, or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness. Policies are typically traditional with-profits or unit-linked (including those with unitized with-profits funds). Endowments can be cashed in early (or surrendered) and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid into it.


Accidental death

Accidental death insurance is a type of limited life insurance that is designed to cover the insured should they die as a result of an accident. "Accidents" run the gamut from abrasions to catastrophes but normally do not include deaths resulting from non-accident-related health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurance policies. Such insurance can also be '' accidental death and dismemberment insurance'' or ''AD&D''. In an AD&D policy, benefits are available not only for accidental death but also for the loss of limbs or body functions such as sight and hearing. Accidental death and AD&D policies pay actual benefits only very rarely, either because the cause of death is not covered by the policy or because death occurs well after the accident, by which time the premiums have gone unpaid. Various AD&D policies have different terms and exclusions. Risky activities such as parachuting, flying, professional sports, or military service are often omitted from coverage. Accidental death insurance can also supplement standard life insurance as a rider. If a rider is purchased, the policy generally pays double the face amount if the insured dies from an accident. This was once called ''
double indemnity ''Double Indemnity'' is a 1944 American crime film, crime film noir directed by Billy Wilder, co-written by Wilder and Raymond Chandler, and produced by Buddy DeSylva and Joseph Sistrom. The screenplay was based on James M. Cain's 1943 novel of ...
insurance''. In some cases, triple indemnity coverage may be available.


Senior and pre-need products

Insurance companies have in recent years developed products for niche markets, most notably targeting seniors in an aging population. These are often low to moderate face value whole life insurance policies, allowing senior citizens (ages 50-85) to purchase affordable insurance later in life. This may also be marketed as ''final expense insurance'' or burial insurance and usually have death benefits between $2,000 and $40,000. One reason for their popularity is that they only require answers to simple "yes" or "no" questions, while most other life insurance policies require a medical exam to qualify. As with other policy types, the range of premiums can vary widely. Health questions can vary substantially between exam and no-exam policies. It may be possible for individuals with certain conditions to qualify for one type of coverage and not another. Because seniors sometimes are not fully aware of the policy provisions, policyholders may believe that their policies last for a lifetime, for example, and that Premiums on some policies increase at regular intervals, such as every five years. ''Pre-need life insurance policies'' are limited premium payment, whole life policies that are usually purchased by older applicants, though they are available to everyone. This type of insurance is designed to cover specific
funeral A funeral is a ceremony connected with the Disposal of human corpses, final disposition of a corpse, such as a burial or cremation, with the attendant observances. Funerary customs comprise the complex of beliefs and practices used by a culture ...
expenses that the applicant has designated in a contract with a
funeral home A funeral home, funeral parlor or mortuary, is a business that provides burial and funeral services for the dead and their families. These services may include a prepared wake (ceremony), wake and funeral, and the provision of a chapel for the fun ...
. The policy's death benefit is initially based on the funeral cost at the time of prearrangement, and it then typically grows as interest is credited. In exchange for the policy owner's designation, the funeral home typically guarantees that the proceeds will cover the cost of the funeral, no matter when death occurs. Excess proceeds may go either to the insured's estate, a designated beneficiary, or the funeral home as set forth in the contract. Purchasers of these policies usually make a single premium payment at the time of prearrangement, but some companies also allow premiums to be paid over as much as ten years.


Related products

''Riders'' are modifications to the insurance policy added at the same time the policy is issued. These riders change the basic policy to provide some features desired by the policy owner. A common rider is ''accidental death''. Another common rider is a ''premium waiver'', which waives future premiums if the insured becomes disabled. ''Joint life insurance'' is either term or permanent life insurance that insures two or more persons, with proceeds payable on the death of ''either''.


Unit-linked insurance plans

Unit-linked insurance plans are unique insurance plans which are similar to mutual funds and term insurance plans combined as one product. The investor does not participate in the profits of the plan per se but gets returns based on the returns on the chosen funds.


With-profits policies

Some policies afford the policyholder a share of the profits of the insurance company—these are termed with-profits policies. Other policies provide no rights to a share of the profits of the company—these are ''non-profit'' policies. With-profit policies are used as a form of
collective investment scheme An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These ad ...
to achieve capital growth. Other policies offer a guaranteed return not dependent on the company's underlying investment performance; these are often referred to as ''without-profit'' policies, which may be construed as a misnomer.


Taxation


India

According to section 80C of the Income Tax Act, 1961 (of the Indian penal code) premiums paid towards a valid life insurance policy can be exempted from the taxable income. Along with life insurance premiums, section 80C allows an exemption for other financial instruments such as Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), and health insurance premiums are some of them. The total amount that can be exempted from the taxable income for section 80C is capped at a maximum of INR 150,000. The exemptions are eligible for individuals (Indian citizens) or Hindu Undivided Family (HUF). Apart from tax benefit under section 80C, in India, a policy holder is entitled for a tax exemption on the death benefit received. The received amount is fully exempt from Income Tax under Section 10(10D).


Australia

Where the life insurance is provided through a superannuation fund, contributions made to fund insurance premiums are tax deductible for self-employed persons and substantially self-employed persons and employers. However, where life insurance is held outside of the superannuation environment, the premiums are generally not tax deductible. For insurance through a superannuation fund, the annual deductible contributions to the superannuation funds are subject to age limits. These limits apply to employers making deductible contributions. They also apply to self-employed persons and substantially self-employed persons. Included in these overall limits are insurance premiums. This means that no additional deductible contributions can be made for the funding of insurance premiums. Insurance premiums can, however, be funded by undeducted contributions. For further information on deductible contributions see "under what conditions can an employer claim a deduction for contributions made on behalf of their employees?" and "what is the definition of substantially self-employed?". The insurance premium paid by the superannuation fund can be claimed by the fund as a deduction to reduce the 15% tax on contributions and earnings. (Ref: ITAA 1936, Section 279).


South Africa

Premiums paid by a policyholder are not deductible from taxable income, although premiums paid via an approved
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
registered in terms of the Income Tax Act are permitted to be deducted from personal income tax (whether these premiums are nominally being paid by the employer or employee). The benefits arising from life assurance policies are generally not taxable as income to beneficiaries (again in the case of approved benefits, these fall under retirement or withdrawal taxation rules from
SARS Severe acute respiratory syndrome (SARS) is a viral respiratory disease of zoonotic origin caused by the severe acute respiratory syndrome coronavirus (SARS-CoV or SARS-CoV-1), the first identified strain of the SARS coronavirus species, ''sever ...
). Investment return within the policy will be taxed within the life policy and paid by the life assurer depending on the nature of the policyholder (whether natural person, company-owned, untaxed, or a retirement fund).


United States

Premiums paid by the policy owner are normally not deductible for federal and state
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
purposes, and proceeds paid by the insurer upon the death of the insured are not included in gross income for federal and state income tax purposes. However, if the proceeds are included in the "estate" of the deceased, it is likely they will be subject to federal and state estate and inheritance tax. Cash value increases within the policy are not subject to income taxes unless certain events occur. For this reason, insurance policies can be legal and legitimate
tax shelter Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international taxation, internatio ...
wherein savings can increase without taxation until the owner withdraws the money from the policy. In flexible-premium policies, large deposits of premiums could cause the contract to be considered a ''modified endowment contract'' by the
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...
(IRS), which negates many of the tax advantages associated with life insurance. The insurance company, in most cases, will inform the policy owner of this danger before deciding their premium. The tax ramifications of life insurance are complex. The policy owner would be well advised to carefully consider them. As always, both the
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and state legislatures can change the tax laws at any time. In 2018, a
fiduciary A fiduciary is a person who holds a Law, legal or ethical relationship of Trust (social sciences), trust with one or more other Party (law), parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other asset ...
standard rule on retirement products by the
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posed a possible risk.


United Kingdom

Premiums are not usually deductible against income tax or
corporation tax A corporate tax, also called corporation tax or company tax, is a direct tax Although the actual definitions vary between jurisdictions, in general, a direct tax or income tax is a tax imposed upon a person or property as distinct from a tax i ...
, however, qualifying policies issued prior to 14 March 1984 do still attract LAPR ( Life Assurance Premium Relief) at 15% (with the net premium being collected from the policyholder). Non-investment life policies do not normally attract either income tax or
capital gains tax A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible ...
on a claim. If the policy has an investment element such as an endowment policy, whole of life policy, or an investment bond then the tax treatment is determined by the qualifying status of the policy. Qualifying status is determined at the outset of the policy if the contract meets certain criteria. Essentially, long-term contracts (10+ years) tend to be qualifying policies and the proceeds are free from income tax and capital gains tax. Single premium contracts and those running for a short term are subject to income tax depending upon the marginal rate in the year a gain is made. All UK insurers pay a special rate of corporation tax on the profits from their life book; this is deemed as meeting the lower rate (20% in 2005-06) of liability for policyholders. Therefore, a policyholder who is a higher-rate taxpayer (40% in 2005-06), or becomes one through the transaction, must pay tax on the gain at the difference between the higher and the lower rate. This gain is reduced by applying a calculation called top-slicing based on the number of years the policy has been held. Although this is complicated, the taxation of life assurance-based investment contracts may be beneficial compared to alternative equity-based collective investment schemes (
unit trust A unit trust is a form of Collective investment scheme, collective investment constituted under a Trust (law), trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a ...
s,
investment trust An investment trust is a form of investment fund An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investm ...
s, and OEICs). One feature which especially favors investment bonds is the "5% cumulative allowance"—the ability to draw 5% of the original investment amount each policy year without being subject to any taxation on the amount withdrawn. If not used in one year, the 5% allowance can roll over into future years, subject to a maximum tax-deferred withdrawal of 100% of the premiums payable. The withdrawal is deemed by the
HMRC HM Revenue and Customs (His Majesty's Revenue and Customs, or HMRC) is a non-ministerial government department, non-ministerial Departments of the United Kingdom Government, department of the His Majesty's Government, UK Government responsible fo ...
(Her Majesty's Revenue and Customs) to be a payment of capital and therefore, the tax liability is deferred until maturity or surrender of the policy. This is an especially useful
tax planning Tax avoidance is the legal usage of the tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government sp ...
tool for higher rate taxpayers who expect to become basic rate taxpayers at some predictable point in the future, as at this point the deferred tax liability will not result in tax being due. The proceeds of a life policy will be included in the estate for death duty (in the UK,
inheritance tax An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the Estate (law), estate (money and property) of a person who has died. International tax law distinguishes ...
) purposes. Policies written in trust may fall outside the estate. Trust law and taxation of trusts can be complicated, so any individual intending to use trusts for tax planning would usually seek professional advice from an independent financial adviser and/or a
solicitor A solicitor is a legal practitioner who traditionally deals with most of the legal matters in some jurisdictions. A person must have Admission to practice law, legally-defined qualifications, which vary from one jurisdiction to another, to be des ...
.


Pension term assurance

Although available before April 2006, from this date pension term assurance became widely available in the UK. Most UK insurers adopted the name "life insurance with tax relief" for the product. Pension term assurance is effectively normal term life assurance with tax relief on the premiums. All premiums are paid at a net basic rate tax of 22%, and higher-rate taxpayers can gain an extra 18% tax relief via their tax return. Although not suitable for all, PTA briefly became one of the most common forms of life assurance sold in the UK until
Chancellor Chancellor ( la, cancellarius) is a title of various official positions in the governments of many nations. The original chancellors were the of Roman courts of justice—ushers, who sat at the or lattice work screens of a basilica or law cou ...
Gordon Brown James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party (UK), Leader of the Labour Party from 2007 to 2010. He previously served as Chance ...
announced the withdrawal of the scheme in his pre-budget announcement on 6 December 2006.


Stranger originated

'' Stranger-originated life insurance'' or STOLI is a life insurance policy that is held or financed by a person who has no relationship to the insured person. Generally, the purpose of life insurance is to provide peace of mind by assuring that financial loss or hardship will be alleviated in the event of the insured person's death. STOLI has often been used as an investment technique whereby investors will encourage someone (usually an elderly person) to purchase life insurance and name the investors as the beneficiary of the policy. This undermines the primary purpose of life insurance, as the investors would incur no financial loss should the insured person die. In some jurisdictions, there are laws to discourage or prevent STOLI.


Criticism

Although some aspects of the application process (such as
underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabil ...
and insurable interest provisions) make it difficult, life insurance policies have been used to facilitate exploitation and fraud. In the case of life insurance, there is a possible motive to purchase a life insurance policy, particularly if the face value is substantial, and then
murder Murder is the unlawful killing of another human Humans (''Homo sapiens'') are the most abundant and widespread species of primate, characterized by bipedality, bipedalism and exceptional cognitive skills due to a large and complex Huma ...
the insured. Usually, the larger the claim and/or the more serious the incident, the larger and more intense the ensuing investigation by police and insurer investigators. Multiple fictional and non-fictional works, including books, films, television series and podcasts have featured the scenario as a
plot device A plot device or plot mechanism is any technique in a narrative A narrative, story, or tale is any account of a series of related events or experiences, whether nonfictional (memoir, biography, news report, documentary, travel literature, tr ...
or actually occurring as a
true crime True crime is a nonfiction literary, podcast, and film genre in which the author examines an actual crime and details the actions of real people associated with and affected by criminal events. The crimes most commonly include murder; about 40 per ...
. There was also a documented case in Los Angeles in 2006 where two elderly women were accused of taking in homeless men and assisting them. As part of their assistance, they took out life insurance for the men. After the contestability period ended on the policies, the women are alleged to have had the men killed via
hit-and-run In traffic laws, a hit and run or a hit-and-run is the act of causing a traffic collision and not stopping afterwards. It is considered a supplemental crime in most jurisdictions. Additional obligation In many jurisdictions, there may be an a ...
vehicular homicide. On April 17, 2016, a report by
Lesley Stahl Lesley Rene Stahl (born December 16, 1941) is an American television journalist. She has spent most of her career with CBS News, where she began as a producer in 1971. Since 1991, she has reported for CBS's ''60 Minutes''. She is known for her ne ...
on ''
60 Minutes ''60 Minutes'' is an American television news magazine broadcast on the CBS television network. Debuting in 1968, the program was created by Don Hewitt and Bill Leonard (journalist), Bill Leonard, who chose to set it apart from other news progr ...
'' claimed that life insurance companies do not pay significant numbers of beneficiaries. This is because many people named as beneficiaries never submit claims to the insurance companies upon the death of the insured, and are unaware that any benefit exists to be claimed, though the insurance companies have full knowledge. The amounts of such benefits are often small, but the numbers of would-be beneficiaries are quite large. These unclaimed benefits eventually become sources of profit.


See also

* Corporate-owned life insurance * Critical illness insurance * Economic capital *
Estate planning Estate planning is the process of anticipating and arranging, during a person's life, for the management and disposal of that person's estate during the person's life, in the event the person becomes incapacitated and after death. The planning inc ...
* False insurance claims * General insurance * Internal Revenue Code section 79 * Interstate Insurance Product Regulation Commission *
Life expectancy Life expectancy is a statistical measure of the average time an organism is expected to live, based on the year of its birth, current age, and other demographic factors like sex. The most commonly used measure is life expectancy at birth ...
* Life settlement * Pet insurance * Retirement planning * Return of premium life insurance * Segregated funds * Servicemembers' Group Life Insurance * Term life insurance *
Tontine A tontine () is an investment linked to a living person which provides an income for as long as that person is alive. Such schemes originated as plans for governments to raise capital in the 17th century and became relatively widespread in the 18 ...


References


Specific references


General sources

* * Oviatt, F. C. "Economic place of insurance and its relation to society" in *


External links

{{DEFAULTSORT:Life Insurance Types of insurance