Life Insurance Exists to Protect Families in the Unfortunate Circumstance of Mortality, Different Products, Such as Whole Life and Term Life Insurance Vary in Cost and Coverage.

For many of us, the future holds a lot of uncertainty, and we always strive to lessen the effects of unexpected events that may come our way. This anxiety almost always increases as we advance in age and start building our families. Husbands and wives would want that their spouse and their children to not have to suffer financial difficulties in the event that mortality hits them first. Parents want to be able to afford the best for their children including their education, health and upbringing in case the unfortunate incidence that they cannot raise them on their own. One way that Americans are able to do this is by purchasing life insurance.

Life insurance is a financial product that is bound by a contract and is entered into by an individual (policy-holder or insured) and a business entity (insurance provider or insurer); the contract, also known as an insurance policy, states that the insurer promises to pay the policy-holder a certain amount of money, depending on the premium of the insurance policy, in the event that the insured dies. It is the insured’s responsibility to pay, in lump sum or staggered regular payments, for the amount of the insurance policy purchased. The contract also stipulates certain restrictions in the indemnification of the loss of life of the policy holder; such exclusions may include death due to self-inflicted harm, natural disasters, war or civil unrest. Though these exclusions may seem unfair and prejudicial on the side of the insured, the vast majority of Americans suffer mortality of many other causes than those mentioned above, making the purchase of a life insurance a worth-while investment.

Until recently, the life insurance industry has offered very simple products for the consumers to choose from. There were historically just two basic life insurance products, namely whole life insurance and term life insurance. Nowadays, life insurance  products have become more sophisticated and increasingly complicated; the products that the life insurance industry now offers include, among many others, term life, whole life, universal life, limited-pay life insurance, variable universal life, etc. The current variation in life insurance products being offered was the result of industry trends and general market movements. While life insurance providers would want higher returns on investments they enter into using funds they have accumulated from the payments made by the insured, policy holders’ clamor for transparency on how these funds are actually being managed. It is now very common for policy holders to choose the portfolio of securities in which funds are invested. The insurer may then just provide certain guarantees (death benefit or investment return) that are wrapped around this variable product.

Due to the recent and continuing economic downturn, not just in the US but also elsewhere in the world, Americans are trying to move away from very sophisticated life insurance products. One example of this is the term life insurance. This type of life insurance covers the insured for a specific period of time, called a ‘term’ in industry parlance. Term life insurance works by ensuring that the insured’s beneficiaries are paid the coverage of the insurance when the policy holder dies within the term covered. This is usually the cheapest form of life insurance available in the US market. The simplest example of a term life insurance is one that is bought for a period of one year, in which the premium paid by the insured is computed based on the probability of that person dying within one year. One downside to this type of insurance is that the insured must always renew the insurance policy, since if he or she dies even at least one day after the insurance expires, his beneficiaries will not receive anything. Another not-so-good characteristic of a term life insurance is the difficulties that the insured may encounter in renewing the policy, where the insured’s probability of dying may have increased during the coverage period of the term life insurance. In this context, the insurer may refuse the renewal of the policy as it may deem the insured “uninsurable”; an example of which may be in an individual diagnosed of a terminal illness, but is projected to survive past the period of his term life insurance.