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What About Life Insurance?

Wouldn’t it be refreshing if the definition of life insurance followed the general definition of all forms of insurance in that it provided an indemnity (compensation, in other words) against some risk that might or might not happen. You insure your car every year, for example, yet the accident against which you have bought the insurance might or might never happen. When it comes to life insurance, however, it is clear that the definition needs to embrace the fact that there is just one unhappy certainty in life and that is that we all die at some time.In terms of insurance cover that takes this uncomfortable certainty into account, therefore, in the UK, at least, it is typically normal to distinguish between life assurance (which continues until the inevitable happens and the individual concerned does indeed die) and life insurance, which provides cover against the possibility of the individual dying within a certain, agreed period of time – in insurance language, the insured “term.”Life assuranceLife assurance, therefore, involves the payment of a monthly premium, part of which goes towards generating an assured, lump sum payment (typically to named beneficiaries) on the individual’s death, whenever that might be; whilst another part of the premiums are invested into a capital fund intended to grow in value over time.Life assurance, therefore, typically offers a way – in some instances, with certain tax advantages – of providing an inheritance for surviving beneficiaries, together with an element of investment.Life insuranceLife insurance, on the other hand, is the title generally reserved for situations where the insured individual may or may not die during a predetermined period of time – sensibly enough, therefore, it is frequently described as term life insurance. If the insured individual dies within the prescribed term, during which premiums are paid each month, the insurance company pays out the agreed lump sum; if the insured survives the agreed term, however, no payment at all is made by the insurer.This is insurance, therefore, much closer in nature to insurance as most people know it; premiums are paid against a risk that might or might not occur. It is popular and it is widely held – the especially good news is that the cost of this form of insurance has actually fallen in real terms during the past decade or so.Term life insurance offers an ideal way for ensuring that dependents continue to be adequately provided for in the event of the unexpected and untimely death of the insured individual. The contribution made by the insured person might be financial (as in the case of a family breadwinner) or more general and indeterminate in financial terms (as in the case of a mother and “housewife”). In either event, however, if the individual dies within the term set out in the insurance contract, an agreed, lump sum life insurance settlement is made in favour of the surviving, named beneficiaries.Such life insurance policies may be invaluable in terms of providing a general-purpose lump sum payment to ease the surviving dependents through the financial hardships following the insured’s death, or tailored to meet a specific need – most commonly, the full repayment of any outstanding mortgage. Indeed, if the mortgage concerned is a standard repayment mortgage, with a steadily reducing balance, then decreasing term life insurance may for some homeowners represent a cost-efficient way of providing financial protection for the family. It may be cheaper as the insurer takes into account the fact that the outstanding mortgage is reducing in value, the value of a claim in the event of the insured’s death is thereby reduced, and, so, decreasing term life insurance may be offered at potentially lower-priced premium rates.