What Is Life Insurance: A Look At Life Insurance
What is life insurance? It is protection against financial loss following the death of the insured person and is a contract reached between an insurance company and an individual. Under this contract, insurance companies will make a lump-sum payment to named beneficiaries in the event the insured dies as long as the insured had been making premium payments before his or his demise. The recipients are, thereby, protected from the financial impact the death of the insured would have on them.
So, you might be asking what is life insurance all about, right? The main aim of life insurance is to provide loved ones with a measure of financial stability and security when you die. As such, it is essential that you consider the standard of living you want your dependents to maintain, and your financial position before purchasing a life insurance policy.
For instance, who’ll be responsible for your final medical bills and funeral costs? Will you leave enough funds for ongoing or future expenses such as mortgage payments, college, and daycare? It is advisable that you re-evaluate your policy once a year or when experiencing life-changing events like divorce, marriage, adoption, birth or when purchasing a major item like a house or a business.
How It Works
In understanding what is life insurance, it is important to note that it is an agreement between a person with insurable interests and a life insurance company where the insurer takes up the responsibility of transferring the financial risk of the insured’s premature death in exchange for a specific amount of premium. There are the three main components when it comes to life insurance contracts, and these are:
Death Benefits: Death benefits are the amount of money an insured person’s beneficiaries will receive from the insurance company upon his or her death. While death benefits amounts are determined by the insured, it is the insurance company who determines whether the insured qualifies for coverage based on the cover’s underwriting requirements and whether there’s an insurable interest.
Premium Payments: Using actuarially-based data, the insurance company determines how much premium it will need to cover mortality costs. Things considered to determine this include the insured person’s age, lifestyle, plus his or her personal and family medical history. As long as the person covered pays their premium as agreed, the insurance company will have to release death benefits to the beneficiaries. For term policies, the dividends to be paid include the cost of insurance while for permanent policies, the premium to be paid will include both the cost of insurance plus an extra amount deposited in a cash value account.
Cash Value: Permanent policies include a cash value component that serves two different purposes. It’s a savings account that allows the person insured to accrue capital that could then become a living benefit. Capital will accrue on a tax-deferred basis and could be used by the insured however they like while they are alive. At the same time, cash value could be used by the insurance company to mitigate some of the risks it faces. As cash value accumulates, the total amount the insurance company risks for the death benefit decreases, allowing it to charge a fixed premium.
Types of Life Insurance
When it comes to life insurance, it is worth noting that it is available in several options. These include:
Term Life Insurance �” This insurance option is designed to provide the insured with financial protection for a specified period with premium payment amounts staying the same throughout the coverage period selected. This option is relatively cheaper compared to permanent life insurance.
Universal Life Insurance �” This option is a form of permanent life insurance that’s designed to provide the insured with lifetime coverage. Unlike options like whole life insurance, this cover is flexible and could allow you to lower or raise your premium coverage or payment amounts throughout your life. Universal life insurance typically charges higher premiums compared to most covers.
Whole Life Insurance �” This is another form of permanent life insurance designed to offer the insured lifetime coverage. Considering the coverage period, whole life insurance typically charges higher premiums, which are often fixed. Unlike term life insurance, this cover has a cash value that functions as a savings option that could accumulate tax-deferred as time goes by.
To find out more about what is life insurance, consider speaking to an insurer today to learn about the benefits it has to offer and options available.