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What is a life insurance policy? What does it do? How does it work? Other than the basics, is there anything more I should know? These are just some of the questions my clients would ask before and after they buy their life policies. I suppose that some of you visitors to this site may want these questions answered as well. Let me try to answer, at the least, some of these questions to the best of my ability.

A life policy is an agreement between an individual and a life insurance company which simply states that the company will pay an agreed upon amount to the beneficiaries of this insured should he or she die. There are certain conditions that must be met in order for this sum to be paid. The insured must be truthful in his or her answers to questions on the application for insurance.

• Suicide. It does not matter how the insured dies but if s/he should commit suicide within a specified number of years, usually about 2 years, the amount paid would be limited to the premiums paid to the time of death. If the applicant died by suicide after the 2 year period the company is bound to pay the sum insured.
• Incontestability. Should the applicant misstate any material information that may have caused the company not to issue the policy and should the company find out about this within a specified period, say one year, the life insurance company can withdraw the policy. After that period they cannot contest your policy.
• Misstatement Of Age. If an applicant for life insurance misstates his or her age either deliberately or by accident the amount paid upon death will be the amount that his or her premiums would have bought at the correct age.
• Ownership Of The Policy. The policy is usually owned by the applicant except for certain specific circumstances. The owner and premium payer are usually the same person. If the policy is on the life of a minor child then the parent will own the policy. When the child becomes of age the parent may transfer ownership to the child if he or she wishes. A spouse may own a policy on the life of his or her partner with the consent of the other party.

  A business partner or a stockholder in a closely held corporation may own a life insurance policy on other partners or stockholders. The corporation may also own a policy on other shareholders or key employees.

  If a life insurance policy is assigned to a financial organization or another individual as collateral rights of ownership may be transferred to that organization or individual until the loan has been repaid.

• Premium Payments And Grace Period. The owner or insured is required to pay the contractual premiums. If a payment is missed the company allows the insured to pay the amount within the grace period. This is usually about 30 days. If, after the 30 day grace period the delinquent premium is still unpaid the policy goes into a state of lapse. The policy may be reinstated at a later date but the company requires that the arrears be paid.
• Beneficiaries. Who are the beneficiaries of a life insurance policy. The beneficiaries of a life insurance policy are the people to whom the proceeds are paid. There is usually a certain succession of beneficiaries. Indulge me for a few seconds. There is what is commonly referred to as a primary beneficiary. This is the person to whom the proceeds of the policy will be paid.

  There is also a contingent, or secondary, beneficiary. This person is named with the specific intention of making certain that the proceeds go to the person intended in the event of the death of the primary beneficiary. Let us suppose that the primary beneficiary dies before the insured. The owner of the policy never got around to changing the beneficiary of the policy proceeds. The insured then dies. The contingent beneficiary will receive the proceeds.

  In addition some life insurance policies name what is normally referred to as "further payees". If the primary beneficiary and the secondary beneficiary should die before the insured then the proceeds will go to the "further payees" in whatever manner is stated in the contract.

  Naming these varying levels of beneficiaries are intended to assure that the intentions of the owner of the policy are met.

• Payment Of Policy Proceeds. Upon the death of the insured the the proceeds can be paid either in one lump sum or in the form of an annuity or income. If an income is chosen there are several options which are usually spelled out in your life insurance policy. A fixed amount can be paid until the proceeds are exhausted. You can decide to have the money paid evenly over a fixed period. You can have the interest paid and the principal stay in tact for a specified period.At the end of this period the principal is paid. You can also have the proceeds paid in the form of a life income.

I hope this gives you a better appreciation of how a life insurance policy works.