What is Life Insurance and How does it Work?

In life insurance, the insured person transfers the risk of death to the insurer. It is not always the case that the insured person insures his own life. Therefore, a life insurance contract consists of three parties, the insurer, the insured and the insurance holder.

The other vital part is the beneficiary; This is the person who receives the insurance money if the insured’s death occurs. One or more of these parts could be the same person. For example, if I secure my own life and make my spouse a beneficiary, then I am the insured and the owner. If my wife secures my life and becomes a beneficiary, then she is also the owner and the beneficiary.


An important concept in this regard is the insurable interest. You must have an insurable interest in the life of the person you insure. Believe it or not, in the 19th century there was a practice in which people made speculative guarantees about the life of another person.

For example, if you knew you were making a dangerous trip, you could buy a life insurance policy for yourself, in the hope that you would not get it and you would receive a high payment. These days, you can not ensure anyone’s life. You have to show that you have an interest in this person who lives.

It is believed that you always have an interest in the life of your spouse and guardian if you are minor, but all other relationships must demonstrate the insurable interest. If employers have a very valuable employee or sports teams have a prominent player or a famous actor makes a film for the shoot, their employers can save their lives.

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Most life insurance policies have a suicide clause that states that if the insured usually commits suicide within two years, he will not pay for the policy. There is also a competition period. This will take about two years. If the insured dies within this period, the insurance company has a greater right to investigate the death before deciding if it is a disbursement.

The value of the insurance contract is also subject to the principle of insurable interest. For example, if your spouse provides you $ 10,000 a year for you, you probably will not be able to purchase a $ 50 million life insurance policy. The premium is calculated on the basis of the amount to be paid and the risk of death of the insured person.

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