Life insurance policies have two main components: the policy owner and the insured. The owner is the person who pays the premiums on the policy and the insured is the person whose death triggers the death benefit. The two parties can be the same person or they may be different. For example, Joe owns his policy, but Jane is the insured. A policy owner can also be the guarantor and the one who will pay the premiums on the policy.
Life insurance can also be purchased for a spouse and minor children. Young children usually don’t have meaningful incomes and may need financial support from a parent. Parents may want to buy a moderate-sized policy to protect the future insurability of their children. However, parents should remember that they can only purchase a policy for children up to a certain percentage of their own policy.
Life insurance is important because it helps replace lost income. It gives peace of mind to the family and ensures that they will have enough money to cover expenses like a mortgage or college. Even the cost of a funeral can be expensive, and the death benefit can help pay for these costs. Life insurance is also important because it can help protect the family from financial disasters.
The insurable interest in life insurance occurs when the policyholder has a reasonable expectation of benefiting from the policyholder’s continued life. Typically, this benefit is pecuniary or love-and-affection related. For example, a business would have an insurable interest in key employees. If the person were to die today, his or her beneficiaries could receive a lump-sum check. But how would a beneficiary be able to use the money?
The first step in making a claim on life insurance is determining the beneficiaries. Although it is possible to make a claim on life insurance without having an original copy of the policy, the insured must inform the insurance company of the policy’s existence. In addition, a life insurance claim must be made to the person or people named in the policy.
Life insurance can last your entire life or be renewed in yearly increments. Moreover, it can build cash value tax-deferred over the life of the policy. Depending on the type of policy, the cash value can accumulate over the policy’s term. If the insured person is healthy, the cash value may increase as the policy’s cash value grows.
The type of life insurance you select is another major consideration. Some policies offer cash value instead of the death benefit. The cash value is typically not intended to benefit the beneficiaries. It will revert to the insurance company upon death. Some policy types offer both options, but the latter typically comes with a higher price tag. When purchasing life insurance, it is important to consider the type of policy and how much cash value you need to replace the death benefit.
Taxation is another major concern when it comes to life insurance. While premiums are not deductible against income tax, proceeds of a qualifying policy will not be subject to capital gains or income tax. However, premiums paid on short-term and single-premium contracts are taxable, depending on your marginal rate. In addition, all UK insurers pay special rates of corporation tax on their profits from life books.