Life insurance is a contract between the policyholder and the insurer. In return for premiums received from the policyholder, the insurer undertakes to pay a named beneficiary on the death of the policyholder. The payment will be made either in a lump sum as is the normal case in the USA or in smaller amounts over the stipulated period. The insurance may either be temporary term insurance or permanent insurance. In term insurance, coverage is available for a specified period in return for a specified premium and the policy pays out only if the policyholder dies before the end of this period. Permanent insurance, on the other hand is valid until the death of the policyholder.

Life insurance normally takes the following forms:

Whole Life Insurance: this provides for a fixed premium and cash values at various maturities that are guaranteed by the insurer according to a table. The advantages of such a policy are the guaranteed debt benefits and the guaranteed cash value. The disadvantages are the fixed premium and the fact that the returns may be inferior to other forms of savings.

Universal Life Insurance: this is a relatively new insurance product that attempts to combine the cover available under a whole life policy with flexible premiums and a better return. There are several types of policies available and some of these are indexed either to interest rates or to equities.

Endowment Life Insurance: in an endowment policy, the cash value is built up in such a way that it equals the death benefit by a specified age (called the endowment age). The policy pays out either after a specified period or at a specified age.

Accidental death: this is also known as an AD and D policy (for Accidental Death and Dismemberment). The policy pays out for loss of life due to an accident but also for loss of limbs or functions such as eyesight.