From Wikipedia, the free
encyclopedia
Life
Life insurance provides a
monetary benefit to a decedent's family or other designated beneficiary, and
may specifically provide for income to an insured person's family, burial,
funeral and other final expenses. Life insurance policies often allow the
option of having the proceeds paid to the beneficiary either in a lump sum cash
payment or an annuity. In most states, a person cannot purchase a
policy on another person without their knowledge.
Annuities provide a stream
of payments and are generally classified as insurance because they are issued
by insurance companies, are regulated as insurance, and require the same kinds
of actuarial and investment management expertise that life insurance requires.
Annuities and pensions that pay a benefit for life
are sometimes regarded as insurance against the possibility that aretiree will outlive his or her
financial resources. In that sense, they are the complement of life insurance
and, from an underwriting perspective, are the mirror image of life insurance.
Certain life insurance
contracts accumulate cash values, which may be taken
by the insured if the policy is surrendered or which may be borrowed against.
Some policies, such as annuities andendowment policies,
are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as
the US and the UK, the tax law provides that the interest
on this cash value is not taxable under certain circumstances. This leads to
widespread use of life insurance as a tax-efficient method of saving as well as protection in
the event of early death.
In the US, the tax on
interest income on life insurance policies and annuities is generally deferred.
However, in some cases the benefit derived from tax deferral may be offset by a low
return. This depends upon the insuring company, the type of policy and other
variables (mortality, market return, etc.). Moreover, other income tax saving
vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for
value accumulation.
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