The Importance of Life Insurance
Life insurance seeks to offer protection against financial loss as a result of the premature death of the insured. So the named beneficiary receives the agreed sum of money. Hence, the named beneficiary is protected from the financial loss due to the death of the insured. So, in life insurance there are 2 parties. First of all, there is the life insurance company, which is the insurer. The second party is the person, who has an insurable interest. The named person who receives the agreed sum of money is the beneficiary. Yet, the beneficiary may not be a party to the agreement.
So Life insurance is a contract between an insurer and a person who has an insurable interest. This means that the person will suffer a loss if the insured dies or event occurs. The insurer commits to pay a named beneficiary a sum of money, upon the demise of the insured. In fact, this sum of money is the death benefit. Life insurance covers are legal contracts. Also, the terms of the contract detail the limitations of the insured events.
Life insurers usually limit their liability or exposure. So they exclude specific events such as war, riot, suicide, civil commotion. Misrepresentation and fraud are also excluded in the terms of the contract. Life insurance policies can also cover events like Critical illness and Terminal illnesses. Group Life insurance is available for organizations/companies and governments to cover their employees.
The goal of life insurance
Life insurance seeks to provide a measure of financial security for dependents. This is in case of the premature death of the financial provider. So, before you buy a life insurance policy there several things to consider. First of all, look at your financial situation. Then consider the standard of living you want for your dependents or the survivors. Some important things to think about are:
Who will pay for your final medical bills and funeral costs? Will your family have to move? Will there be enough money to cover current and future expenses? This includes expenses such as mortgage payments, daycare, and education. Hence, it is wise to reexamine your life insurance policies every year. Do this also when you experience a major event in your life. For example, after you get married, after the birth or adoption of a child, or a divorce. Also, reevaluate your life insurance policy after the buying major items. This includes items such as a house or a business.
How does life insurance work?
The policy owner commits to pay insurance premiums. The insurer also promises to pay a lump sum amount of money to a named beneficiary upon the death of the insured. The policy owner can pay the insurance premiums either as a lump sum or in installments. The policy owner names the beneficiary who is not a party to the contract. In life insurance contracts, the insured and the policy owner can be different people.
The owner is the guarantor and pays premiums for the insurance cover. Yet, the insured may not be a party to the contract. For example a parent can buy life insurance on a child’s life. So, in this life insurance contract, the parent is the owner and the child is the insured. It is also possible for the owner and the payer of the policy to be different people. Upon the occurrence of an insured event the life insurer will need evidence or proof. In most cases, the insurer will need the death certificate before settling the claim. That is before making payment. The payment can made in lump sum or in regular installments known as annuity.
So, life insurance is a contract between the insurer and a person with an insurable interest. In fact, the contract transfers the financial risk of premature death to the insurer. Further, in exchange the person pays a specified amount of money. This payment is the premium. So, there are 3 main components of the life insurance contract. These are the death benefit, the premium and a cash value account. In fact, the cash value account only applies in permanent life covers.
This is the amount of money that the named beneficiary will receive if the insured person dies. The insured determines the sum insured. Yet, the insurer must make sure that there is an insurable interest. The insured must also meet underwriting requirements.
The life insurer determines the amount of money needed to cover the risk. So the insurer will consider a many factors. The most important ones are the insured age, lifestyle, personal and family medical history. So long as the insured pays the agreed premium, the insurer is obligated to pay the death benefit. In term policies the premium amount includes the cost of insurance. In case of permanent policies, the premium includes the cost of insurance. It also includes the amount deposited in the cash value account.
Cash value applies to permanent policies. In fact, it serves 2 purposes. First of all, it is a saving account. So it allows the insured to accumulate capital, which can become a living benefit. Besides, the capital accumulates on a tax deferred basis. The insured can also use it for any purpose while he or she is alive. The cash value is also used by the insurer to reduce the risk. So as the cash value accumulates, the extent to which the insurer is at risk for death benefit decreases. In fact, this is how the insurer is able to charge a fixed level premium.
Types of life Insurance
There 2 main types of life insurance. These are Term life and Whole life insurance. Whole life insurance is also permanent life insurance. This type of insurance has several categories. These are traditional whole life, variable life and variable universal insurance. It also includes universal life insurance. Furthermore, life insurance products for individuals are different from life insurance for groups. Here we will discuss individual life insurance products.
1. Term Life Insurance
This is the simplest form of life insurance. In fact, these provide protection for a specified period. In fact, it provides protection for a specified period and doesn’t accumulate a cash value. Also, the premiums are fixed over the life of the cover. Hence, term insurance cover only provides against death. So the policy will pay if death occurs during the term of the policy. The term ranges from 1 to 30 years. There are 2 types of term life insurance covers. These are level term and decreasing term. Further, in level term the death benefit is the same duration of the policy. In decreasing term insurance, the death benefit drops over the duration of the policy.
2. Whole Life insurance/Permanent
Unlike term insurances, these policies remain active until they mature. Yet, they can lapse due lack of premium payments. These insurances offer the benefits of term policies and also allow growth of capital. The insurer can only cancel these policies in the event of a fraudulent application. This too must be within a period defined by law. So, Permanent or Whole life policies pay the death benefit whenever the insured dies. Hence, there is no fixed term. There are 3 main types of permanent or whole life policies. These are universal life insurance, traditional whole life, variable life and variable universal insurance. Furthermore, there are variations within each type.
Whole life or Ordinary life
Whole life is the most common type of permanent life insurance policy. In fact, this policy provides a death benefit and a savings account. So if you choose whole life, you will pay given amounts in premiums, in regular installments. You also get a specific death benefit. Besides the savings element grows depending on the dividends the life insurer pays you.
Variable life combines the death benefit with a savings account. In fact, you can use the savings account to invest in bonds, and stocks. You can also invest in money market mutual funds. So, the value of your policy can grow fast. You also have more risk. This is because if your investment under-performs, your death benefit and cash value will decrease. Yet, some policies guarantee your death benefit will not fall below a certain minimum level.
Variable Universal life
This policy combines the features of universal life policies and variable life policies. So, you have rewards and investment risks like variable life insurance. You also have the ability to adjust your premiums and death benefit. Like universal life insurance.
Universal life insurance
Universal or adjustable life policy provides you more flexibility than whole life insurance. You can also increase the death benefit, but you have to pass a medical examination. Furthermore, the cash value account earns interest at the money market rate. You also have the option of changing your premium payment. You can do so after accumulating money in your account. Yet, you must have enough money in the account to meet the cost. In fact, this can be a useful feature. Especially if your financial situation has changed.
But if you reduce or stop your premium payments, the accumulated savings can be used up. In which case, the insurance policy might lapse. Also, your life cover will end. Hence, consult your insurance agent before reducing or stopping premium payments for a long time. This is because your account may not have enough money to meet the monthly charges. So the life insurance cover may lapse.
The importance of life insurance
Life insurance is an essential part of having a sound financial plan. It also helps to secure the future. So as we get older, start to settle down and begin a family, buying insurance is important. Some of the important reasons why you need life insurance are:
Provides a secure future
Your loved ones depend on you for financial support. So you need to make plans to secure their welfare and well being in case of any untold event. Insurance helps you to secure their future. In fact, it will replace your income, and support your loved ones as you have been. So Insurance is important for parents. It protects the family in case of loss of income. Insurance will help to meet costs such as childcare, education, and mortgage. It can also cover living expenses and much more.
Creates an inheritance
Life insurance will help you create an inheritance. In fact, whole life policies have a saving account which will enable you to grow your wealth. You also receive tax benefits. So you can grow your wealth and secure your financial future. It can also serve as a financial backup. Moreover, you can use the accumulated funds to invest in business and wealth creation.
Greater financial security
Insurance will allow you to meet the cost of your children’s health and education. It can also meet the costs of starting a family or a business. Moreover, you will be able to provide for activities like traveling and much, which are necessary as your children grow up. Hence, insurance will enable you to bring up your children in the best way possible.
Debts and Expenses
Life insurance will help meet your outstanding debts. This includes car loans, mortgage, credit cards, etc. This will also include funeral arrangements and burial costs. In fact, these costs can be a huge burden and cause a lot of pressure for the family. Hence, insurance will provide financial support for your family. It will also cover these costs.
Peace of mind
Peace of mind is important for your well being. Insurance will give you the peace of mind as a parent. So you can go about your business knowing your loved ones are well protected. It allows you to support your family, whatever happens.
In conclusion, life insurance is an essential part of having a sound financial plan and a secure future. Besides, life insurance is cheap and looking at the benefits you will appreciate the need to cover yourself. In fact, once you have life cover, you will begin to feel more secure. You will also have the peace of mind. You will be more comfortable knowing that your loved ones are well protected, in case anything happens to you.