life insurance

noun
Updated on: 9 Nov 2017

Definition of life insurance

:insurance providing for payment of a stipulated sum to a designated beneficiary upon death of the insured

Recent Examples of life insurance from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'life insurance.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of life insurance

1781


Financial Definition of LIFE INSURANCE

term life insurance

What It Is

Term life insurance is a policy which provides financial coverage during a set amount of time. Often considered the "simplest" form of life insurance, it is best suited for providing coverage or income for a short term and on a limited budget.

How It Works

A term life insurance policy covers the policy-holder up to the age specified in the contract. Should a policy holder die before the term is over, a beneficiary will receive a death benefit. Term life insurance policies may be renewed for a premium at the end of a given term if the policy holder's life should exceed the term.

Term life is less expensive that universal life insurance because it does not build up any equity. You are fully covered during the term of the policy, but you do not receive cash back when the term is over.

To illustrate, suppose Bob has a term life insurance policy that covers him financially in the event of death until the age of 40. Should Bob somehow die before the age of 40, the terms of the policy cover him and pay a financial benefit. If Bob lives past the age of 40, however, his policy will not yield any financial benefit. He must renew the policy for another term under new conditions.

Why It Matters

Term life insurance is generally considered one of the more inexpensive ways to secure a death benefit. Because term life insurance will expire when the policy holder reaches a certain age, it is important that policy-holders ensure that renew their the policy when it expires.

Term life is popular with young families who need protection, but also need to keep prices low. It is often intended for income-replacement needs.


universal life insurance

What It Is

Universal life insurance is a type of life insurance policy that allows the policyholder to alter the policy in response to life changes, by merging the benefits of term life insurance with those of a savings account.

How It Works

Universal life insurance is based on whole life insurance. Whole life insurance policies comprise both an insurance and a savings component. The policyholder pays a fixed premium for life. Part of this premium builds up the insurance benefit, while the rest is invested in the savings account. The savings account serves as a tax-deferred resource from which the policyholder may withdraw funds or against which he may take out a loan (in accordance with the terms of the policy). In the event of death, the beneficiary on the policy is awarded the value of the savings account in addition to the accrued death benefit.

Similar to whole life insurance, universal life insurance offers the policyholder greater flexibility with regard to premium, payment, and use of savings and insurance benefits. Unlike whole life insurance, universal life insurance premiums and savings interest rates are variable from month to month. For this reason, universal life policyholders have the option to pay their premiums (in whole or in part) using interest from the associated savings account. However, fluctuations in interest rates and policy premiums pose a risk to policyholders not present in basic whole life insurance. In addition, policyholders, based on their life circumstances, may modify their policies between how the premium amount is allocated between the insurance benefit and savings account. As a result, universal life insurance provides more transparency concerning how the plan is managed as well as the investments that comprise the savings account

Why It Matters

Universal life insurance allows the policyholder to tailor the policy to his individual circumstances to provide the greatest benefit at any stage in life. However, universal life insurance policies do carry higher risk with regard to fluctuations in insurance premiums and interest rates.


variable universal life insurance

What It Is

Variable universal life insurance is a type of life insurance policy that allows the account holder to invest a portion of the premium dollars.

It is not the same as a variable life insurance policy (though it is similar).

How It Works

Variable universal life insurance is a combination of variable life insurance and universal life insurance. Most notably, a variable universal life insurance policy allows you to change your premiums and death benefits (though this will change the coverage amount, of course). Buyers can also make one lump sum payment for their insurance.

A portion of the premium is invested in various instruments -- bonds, mutual funds, etc. The value of those instruments changes daily (hence the name "variable universal life insurance policy"). If the value of these securities rises, insureds can sometimes apply those paper profits toward their premiums (which saves them money). Of course, if the investments don't do well, the premium is still due. If there is enough cash value in the policy to cover the costs of the policy, the policy will stay in force (though some have a required premium for a set number of years to keep the policy in force).

There are two kinds of death benefits in variable universal life policies:fixed death benefits and variable death benefits. The fixed benefit does not increase over time, and cash value builds up against the value of the death benefit, which means the cost of the insurance could decrease over time if the value of the investments are growing. The variable death benefit is equal to the cash value at the time of John's death plus the base death benefit value.

Buyers can increase their death benefits, though they'll likely have to prove that they're in good health. Buyers can also decrease their death benefits, though they may have to pay a surrender charge to do so.

The investments in a variable universal life insurance policy grow tax-deferred, which means that your returns compound at a higher rate than if you had to pay taxes on the gains every year. This can significantly boost the amount that accumulates in the investment accounts.

Why It Matters

Variable universal life insurance policies are regulated as securities, which means your advisor or insurance agent should give you a prospectus that describes the policy in detail, as well as all the investment options. The important thing about this instrument is that the death benefits and value of the investments can fluctuate with the market and with the insured's wishes. In some cases, the policyholder can borrow against the value of the investments in the account. It is important that investors consider the financial stability of the insurer with which they do business; ratings services such as Standard & Poor's and AM Best help.


LIFE INSURANCE Defined for English Language Learners

life insurance

noun

Definition of life insurance for English Language Learners

  • : a type of insurance that pays money to the family of someone who has died


Law Dictionary

life insurance

noun

legal Definition of life insurance

:insurance providing for the payment of money to a designated beneficiary upon the death of the insured — see also endowment insurance
ordinary life insurance
:whole life insurance in this entry
straight life insurance
:whole life insurance in this entry
term life insurance
:life insurance that provides coverage for a set term and does not accumulate cash surrender value
universal life insurance
:life insurance characterized by flexible premiums, benefits, and payment schedules, by the indexing of cash value to money market interest rates, and by the periodic reporting of current value and company costs charged to the account
universal variable life insurance
:variable universal life insurance in this entry
variable life insurance
:life insurance in which all or part of the cash value of the policy is located in a tax-deferred investment portfolio with risk assumed by the insured for investment losses — compare variable annuity at annuity
variable universal life insurance
:universal life insurance that includes the investment component of variable life insurance called also universal variable life insurance
whole life insurance
:life insurance that provides coverage over the life of the insured and that can be sold for surrender value or used as the basis of low-interest loans called also ordinary life insurance, straight life insurance

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