What Is Life Insurance?

Insurance is a transfer of risk from one party to another through a legal contract. All insurance contracts are aleatory meaning there is an element of chance and unequal exchange of value conditioned upon an occurrence. Ex. $100k life insurance policy is paid out if insured dies only 2 months into policy and insured paid only $100 of premium (unequal exchange). Also, these are unilateral contracts - one side or one party (insurer) makes an enforceable promise or is legally bound to cover losses. This was a solution to economic uncertainties and losses - better loss control.

The most significant advantage of insurance contracts: eliminating the possiblity of an unplanned expense.

Health, property, casualty, car, homeowners, renters insurance pays off financial losses or reimburses the insured = indemnify.

Life insurance pays in the event of loss of life.

There are two parties: the insurer (the insurance company) and the insured (usually the policy owner but as owner you can assign someone else to be the insured). The insurer promises to pay a designated beneficiary a sum of money upon the death of the insured. Depending on the contract other events can trigger payment while you're alive (riders).

There are four elements of every life insurance contract to be legally valid:

1. Offer and acceptance: the application (offer) by one party (insurer) and the approval (acceptance) of exact terms by another party (applicant or proposed insured).
2. Consideration: the applicant completes the application and pays initial premium in exchange for the insurer's promise to pay the benefit (the contract becomes binding at this point).

Please consider me for insurance!        

1. Legal purpose: there has to be an insurable interest meaning a financial relationship. A possibility of losing money or something of value when a loss happens i.e. when a husband is diagnosed with cancer and passes his family suffers the financial burden. You can have an insurable interest in yourself too.
2. Competent parties: the insurer and the proposed insured (applicant) is presumed competent unless he/she is a minor, mentally infirm, or under the influence. Each state has its own laws.

Life insurance contracts are not personal, you can transfer ownership to another. A great example is setting up a policy for your child at birth and transferring ownership upon the child turning of legal age (usually 18 years old depending on the state). Life insurance also has provisions, options, and riders. Provisions are in general to protect the owner of the policy. Ex. policy loan provisions are required on all whole life insurance policies giving you the right to access equity or receive an advance against the cash value of the policy. Riders are legal attachments amending a policy with additional or reduction in benefits (benefit or exclusion rider). Ex. the terminal illness rider can trigger payment of the death benefit to help with medical costs.

The intricacies of life insurance can become highly complex but at its basic premise life insurance can:

1. Protect your family
2. Preserve your wealth
3. Provide financial stability

The content available is for information purposes only. While our best intentions are to provide accurate and timely information, you should always consult with a retirement, tax, and legal financial professional prior to taking any action. Please contact Patrick for more information and to assist in your financial future.