Life insurance may be defined as a plan under which large groups of individuals can equalize the burden of loss from death by distributing funds to the beneficiaries of those who die. From the individual standpoint life insurance is a means by which an estate may be created immediately for one’s heirs and dependents. It has achieved its greatest acceptance in Canada, the United States, Belgium, South Korea, Australia, Ireland, New Zealand, The Netherlands, and Japan, countries in which the face value of life insurance policies in force generally exceeds the national income.

In the United States in 1990 nearly $9.4 trillion of life insurance was in force. The assets of the more than 2.200 U.S. life insurance companies totaled nearly $1.4 trillion, making life insurance one of the largest savings institutions in the United States. Much the same is true of other wealthy countries, in which life insurance has become a major channel of saving and investment, with important consequences for the national economy.

Life insurance is relatively little used in poor countries, although its acceptance has been increasing.

Type Of Contents

The major types of life insurance contracts are tern, whole life, and universal life. But innumerable combinations of these basic types are sold. Term insurance contracts, issued for specified periods of years, are the simplest. Protection under these contracts expires at the end of the stated period, with no cash value remaining whole life contracts, on the other hand, run for the whole of the insured’s life and gradually accumulate a cash value. The cash value, which is less than the face value of the policy, is paid to the policyholder when the contract matures or is surrendered. Universal life contracts, a relatively new form of coverage introduced in the United States in 1979, have become a major class of life insurance. They allow the owner to decide the timing and size of the premium and amount of death benefits of the policy. In this contract, the insurer makes a charge each month for general expenses and mortality costs and credits the amount of interest earned to the policy holder.

There are two general types of universal life contracts, type A and type B. in type A policies the death benefits is a set amount while in type B policies the death benefit is a set amount plus whatever cash value has been built up in the policy. Life insurance may also be classified, according to type of customer as ordinary, group, industrial, and credit. The ordinary insurance market includes customers of whole life, term, and universal life contracts and is made up primarily of individual purchasers of annual-premium insurance.

The group insurance market consists mainly of employers who arrange group contracts to cover their employees. The industrial insurance market consists of individual contracts sold in small amounts with premiums collected weekly or monthly at the policyholder’s home. Credit life insurance is sold to individual, usually as part of an installment purchase contracts, if the insured dies before the installment payments are completed, the seller is protected for the balance of the unpaid debt. Insurance may be issued with a premium that remains the same throughout the premium-paying period, or it may be issued with a premium that increases periodically according to the age of the insured. Practically all ordinary life insurance policies are issued on a level-premium basis, which makes it necessary to charge more then the true cost of the insurance in the earlier years of the contract in order to make up for much higher costs in the later years, the so-called overcharges in the earlier years are not really overcharges but are a necessary part of the total insurance plan, reflecting the fact that mortality rates increase with age.

The insured is not overpaying for protection, because of the claim on the cash value that accumulate in the early years. The policyholder may borrow on this value or may recapture it completely by lapsing the policy. The insured does not, however, have a claim on all the earnings that accrue to the insurance company from investing the funds of its policyholders. By combining term and whole life insurance, an insurer can provide many different kinds of policies.

Two examples of such “package” contracts are the family income policy and the mortgage protection policy. In each of these, a base policy, usually whole life insurance is combined with term insurance calculated so that the amount or protection declines as the policy runs its course. In the case of the mortgage protection contract, for example, the amount of the decreasing term insurance is designed roughly to approximate the amount of the mortgage on a property. As the mortgage is paid off, the amount of insurance declines correspondingly. At the end of the mortgage period the decreasing term insurance expires, leaving the base policy still in force. Similarly, in a family income policy, the decreasing term insurance is arranged to provide a given income to the beneficiary over a period of years roughly corresponding to the period during which the children are young and dependent. Some whole life policies permit the insured to limit the period during which premiums are to be paid. Common examples of these are 20-year life, 30-year life, and life paid up at age 65.

On these contracts, the insured pays a higher premium to compensate for the limited premium-paying period. At the end of the stated period, the policy is said to be” paid up”, but it remains effective until death or surrender. Term insurance is most appropriate when the need for protection runs for only a limited period; whole life insurance is most appropriate when the protection need is permanent. The universal life plan, which earns interest at a rate roughly equal to that earned by the insurer (approximately the rate available in long-term bonds and mortgages), may be used as a convenient vehicle by which to save money. The owner can vary the amount of death protection as the need for changes in the course of life. The policy offers flexibility and saves the owner commission expense by eliminating the need for dropping one policy and taking out another as protection requirements change.

Settlment Options

The death proceeds or cash values of insurance may be settled in various ways. The insured may take the cash value and lapse the policy. A beneficiary may take a lump sum settlement of the face amount upon the death of the insured. The beneficiary may, instead, elect to receive the proceeds over a given number of years or in some fixed amount, such as $100 a month, for as long as the proceeds last. The money may be left with the insurer temporarily to draw interest. Or the proceeds may be used to purchase a life annuity, which in effect is another insurance policy guaranteeing regular payments for the life of the insured.

Other Provisions

Life insurance policies contain various clauses that protect the rights of beneficiaries and the insured. Perhaps the best-known is the incontestable clause, which provides that if a policy has been in force for two years the insurer may not afterward refuse to pay the proceeds or cancel the contract for any reason except nonpayment of premiums. Thus, if the insured made a material misrepresentation when the policy was originally obtained and this misrepresentation is not discovered until after the contestable period, beneficiaries may still receive the value of the policy so long as the premiums are maintained.

Another protected clause is the suicide clause, which states that after a given period, usually two years, the insurer may not deny liability for subsequent suicide of the insured. If suicide occurs within the period, the insurer tenders to the beneficiary only the premiums that have been paid. If the age of the insured was misstated when the policy was taken out, the misstatement-of-age clause provides that the amount payable is the amount of insurance that would have been purchased for the premium had the correct age been stated. Many life insurance policies, Known as participating policies, return dividends to the insured. The dividends, which may amount to 20 percent of the premiums, may be accumulated in cash left with the insurer at interest, used to buy additional life insurance, used to reduce payments, or used to pay up the contract sooner than would otherwise have been possible.

Special Riders

The insured may, at a nominal charge, attach to the contract a waiver-of-premium rider under which premium payments will be waived in the event of total and permanent disability before the age of 60. Under the disability income rider, should the insured become totally and permanently disabled, a monthly income will be paid. Under the double indemnity rider, if death occurs through accident, the insurance payable is double the face amount.

Private Health Insurance

In many countries health insurance has become a governmental institution. In some, doctors and other professional staff are employed, directly, by a government agency on a full-time or part-time salaried basis, and health facilities are owned or operated by the government. This has been the practice in Australia, Brazil, Canada, Chile, Greece, Ireland, Mexico, New Zealand, Sweden, Turkey, and the countries of Eastern Europe. In other countries the government pays for medical care provided by private physicians; these countries include Australia, Denmark, The Netherlands, Norway, and Spain. In some countries private health insurance programs exist along with, or as part of, the government program. Various combinations of programs are possible, and it is difficult to summarize all the arrangements that actually exist. The United States provides government-run medical services in veterans’ hospitals and mental hospitals, and it is also a governmental health insurance program for citizens age 65 and over (Medicare) under the social security Act amendments of 1965, but most health insurance in United States still consists of private programs. Much private health insurance in the United States is operated on a group basis, generally through groups of employees whose payments may be subsidized by their employer. The following is a description of the principles of private health insurance. Government medical services are discussed in the article social security.

Group Insurance

Groups have always been important in the insurance field, from the burial societies of the Romans and the insurance funds of the medieval guilds to the fraternal and religious insurance plans of modern times. In the 20th century private insurance companies have written increasingly large amounts of group insurance, particularly in life insurance, health insurance, and annuities. In 1990 more than 95 percent of the industrial labour force in the United States was covered by group life and health insurance plans established by employers. Much of the impetus for these employee benefit plans came from the labour unions, which pressed for such “fringe benefits” in bargaining with employers. Group insurance is widely used throughout the world, both in the form of private plans and as social insurance plans. Social security plans with group coverage exist in more than 140 nations. Private group plans are generally offered wherever private life and health insurance companies operate. Group life insurance is the most commonly offered plan; group health plans are government-operated in many nations. In many countries, group pension plans are common as a supplement to social insurance pension schemes. Group insurance has been especially popular in Japan; where many employees serve a company for life. All Japanese life insurance companies offer group life insurance. Health insurance is provided by the government. Funded group pensions became popular after a 1962 tax law made contributions tax-deductible for Japanese employers. In addition, virtually all Japanese employers provide lump-sum retirement allowances to their workers.


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