Life insurance is a particular type of financial instrument with different beneficiaries and parties to life insurance. To be able to use life insurance effectively and well the different parties should be understood.
The parties to a life insurance policy are the following parties, the insured, the beneficiary, the owner and the insurer.
The Insured is the person on whom the life insurance is based. Their life is the one that is insured. If they die, or if anything happens to the person that is covered by the insurance then the policy pays out.
The beneficiary is the person, or persons, who are paid the money if the event happens. They are the people who will suffer otherwise if the person dies and the monetary compensation is designed to protect them.
The owner of the insurance policy is the person who pays the premiums and is responsible for keeping up payment of the policies. Usually this person is the insured, as they want to take care of the family for which they are the bread winner. However this is not always the case. In some cases the person who owns the policy, and pays any premiums is the beneficiary.
This may be a parent with a grown up son or daughter, who buys term insurance in case their child will die when they are retired and so one of their sources of security is gone. Another example of this type of insurance is so called key man insurance when a company pays to cover the life of a skilled worker or senior manager. If that person dies then the company will collect on the policy. This policy is written in order to stop the company being in serious financial trouble if they were to suddenly lose one of their key players.
The insurer is the company that writes the policy, collects the premiums and pays out if the policy is activated. There are two ways in which these companies make money. The first is to pay out less money than they collect in premiums – which is why they try to collect as much information as possible on the insured person so as to analyse the risk.
The second way is to invest the money. This is done because the premiums tend to be paid some time before the event triggers a payout, so giving the company some time to invest the profits.