You will agree with me that as we engaged in various activities, in one way or the other we put our lives on the line. Conscious of this fact, and as one grows up a family, there may be no other better way to secure some financial benefits for your family if peradventure you don’t return home. Many families who have benefited from this type of insurance will argue that, it was a great help to them after the passing away of one of theirs (especially if he was the bread winner of the family). But before we go on to talk about the benefits of life insurance, the best life insurance policies, how life insurance works and the various types of life insurance, let’s answer the question some people seek its answer “what is life insurance?”
What is Life Insurance?
Life assurance is a protection against financial loss that would spring, arise, or proceed from the premature death of an insured. The named beneficiary receives the yield, income, or money and is thereby safeguarded from the financial impact of the death of the insured. The decease benefit is paid by a life insurer in consideration for premium payments made by the insured.
The goal of life insurance is to provide a measure of financial security for your family after you die. So, before acquiring a life insurance policy, consider your standard of living and the financial situation you want to maintain for your survivors or dependents. For instance, who will be responsible for your final medical bills and funeral costs? Will there be adequate funds for future or ongoing expenses such as Mortgage daycare payments and college? Would your family have to relocate? It is wise or judicious or careful to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, the birth or adoption of a child, divorce or the purchase of a major item such as a house or business
In the Commonwealth of Nations,life assurance or life insurance is a contract between an assurer or insurer and an insurance policy holder an (insured), where the insurer promises to pay a specified beneficiary a sum of benefit (money) in exchange for a premium, upon the death of the policy holder (insured person). Depending on the contract, other factors such as critical illness or terminal illness can also trigger payment. The insurance company (policy holder) typically pays a premium, either as one lump sum or as regularly. Other expenses (such as funeral expenses) can also be included in the benefits. Life policies are legal agreements and the terms of the contract describe the restriction of the insured events. Certain limitations are often written into the contract to limit the liability of the insurer; such as war, riot, and civil commotion, fraud, claims relating to suicide
Life-based agreements tend to fall into two major types. There are Investment policies which are the main aim of these policies is to ease or facilitate the growth of capital by regular or single premiums. Common forms (in the U.S.) are variable life, universal life and whole life policies and Protection policies – de- more common in years past signed to pay a benefit, typically a lump sum payment, in the event of a specified occurrence. A common form - of a protection policy design is term insurance.
Insurance coverage serves two major purposes, to substitute for the insured’s income if he or she dies and to qualify the insured for a favorable tax treatment. The insured buy insurance cover from the insurance company, and pay specific periodic amounts (Premium) for the term (duration or life) of the policy. If the insured dies before the term is completed, a guarantee sum (the face amount of the policy) is paid to the named beneficiaries. In case the insured pull through the terms, then depending on the type of the policy, he or she receives the full or part of the face amount of the policy.
There are four main types of insurance; term life insurance; whole life issuances Endowment life policy and Annuity, Life insurance has its origins in the old practices of saving money for one’s own funeral cost and is also call assurance.
The Key components of life Insurance and How Life Insurance Works
It is necessary to understand the basic components of life insurance contract. Although there are many different types of life insurance policies that are available on the market nowadays, most life insurance policies share some common elements or components – regardless of the other varying features and benefits.
Life insurance is one of the best acquired or purchased that you’ll ever make for your loved ones. We know that understanding all of the advantage or benefits and terms can be confusing, but it’s necessary that you understand all of the different parts to ensure that you’ve got the best plan to meet your needs.
The three main elements or components of life insurance contract are, in the case of permanent life insurance, a cash value account and a premium payment, a death benefit
Premium Payment: Using actuarially based statistics, the insurer decides or determines the amount of premium it needs to cover mortality costs. Factors such as the insured’s lifestyle, age and personal and family medical history are the main risk determinants. So far as the insured pays the premium as agreed, the insurer remains committed or obligated to pay the death benefit. For permanent policies, the premium amount includes the cost of insurance plus an amount that is deposited to a cash value account. For term policies, the premium amount includes the cost of insurance.
Death Benefit: The death benefit on a life insurance policy is defined as the amount that is payable to a beneficiary when an insured person dies or passes away. Most life insurance policies pay out the death benefit as a lump sum – although there are other options typically available for receipt of the policy proceeds.
The term death benefit is oftentimes used interchangeable with “face amount” or “policy proceeds” Therefore, if a person purchases a life insurance policy of $200.000 then the death benefit or face amount is $200.000
The policy proceeds or death benefit proceeds can also be used to fund the living expenses of an insured’s survivor. This is especially a situation where the insured was the principal or primary income earner in the household and the loss of his or her income would cause significant financial hardship to those who are left behind.
In many cases, the “face amount” or the death benefit proceeds are used by the insured’s loved ones for paying final expenses such as unpaid medical bills and funeral costs– as well as for paying off other debt such as the balance of a mortgage
The death benefit component is found on all categories or types of life insurance. For instance, a term life insurance policy consists predominantly of the promise of face amount proceeds, if the insured should pass away or die, in return for regular specific periodic amounts (premium payments). In order words, permanent life insurance policies are made up of a death benefit component, as well as an underlying investment component or a cash value.
The death benefit is the amount of money the insured’s beneficiaries will receive from the insurer upon the death of the insured. Although the death benefit amount is decided or determined by the insured, the insurer must ascertain or determine whether there is an insurable interest and whether the insured can qualify for the coverage based on its underwriting requirements.
Cash Value: Permanent life insurance includes a cash value component which serves two purposes. It is a savings account that permits or allows the insured to accumulate capital that can become a living benefit. It is also used by the insurer to mitigate its risk. The capital accumulates on a tax-deferred basis and can be used for any purpose while the insured is alive. As the cash value accumulates, the amount the insurer is at loss or risk for the entire death benefit decreases, which is how it is able to charge a specific periodic amounts (Premium) orfixed, level premium.
Types of Life insurance
There are many types or varieties of life insurance. Some of the more common types are explained in the subsequent paragraph below.
Term life insurance: it is generally less cheap than permanent life insurance. Term life insurance is planned or designed to provide financial guarantee or protection for a specific period of time, such as 10 or 20 years. With this ancient or traditional term insurance, the premium payment or “face amount” stays the same for the coverage period you want or select. After that period, policies may offer continued coverage, usually at a substantially higher specific periodic amounts(premium payment rate.)
Needs it helps meet: Term life insurance proceeds can be used to replace lost potential income during working years. This can provide a guarantee or safety net for your beneficiaries and can also help ensure the family's financial goals will still be met—goals like keeping a business running, paying for college and paying off a mortgage. It’s necessary to note that, although term life can be used to substitute or replace lost potential income, life insurance benefits are paid at once in a lump sum, not in regular payments like bank checks or paychecks.
Universal life insurance: Universal life insurance is a type of permanent life insurance designed to provide lifetime protection or coverage. Unlike whole life insurance, universal life insurance policies are flexible and may allow you to raise or lower yourspecific periodic amounts (premium payment) or protection or coverage amounts throughout your lifetime. Additionally, due to its lifetime protection or coverage, universal life typically has higher specific periodic amounts (premium payments) than term.
Universal life insurance was designed or created under the umbrella of permanent life insurance options provide or to give more flexibility than whole life insurance. Specific periodic amounts ( Premiums) within a universal life insurance policy are broken down by the insurance company into two categories: the cost of insurance and a savings component known as the cash value. The total cost of insurance must be covered so the policy remains in force, butspecific periodic amounts (premiums) may be shifted over time based on the policyholder's needs. Premiums(specific periodic amounts) paid over the minimum cost of insurance accumulate within the cash value portion of the policy, and funds can be used to pay specific periodic amounts (premiums). For example, if the savings portion is earning a low return, it can be used instead of external money or funds to pay the guarantee amount (premiums). As long as the minimum cost of insurance is protected or covered, either through paid cash value or specific periodic amounts (premiums) the policy is guaranteed for as long as the initial contract dictates.
Needs it helps meet: Universal life insurance is most often used as part of a flexible estate planning strategy to help secure or preserve wealth to be transferred to benefactors. Another common use is long term income substitute or equivalent replacement, where the need extends beyond working years. Some universal life insurance product are planned or designs to focus on providing both death benefit coverage and building cash value while others focus on providing guaranteed death benefit coverage.
Whole life insurance: Whole life insurance and universal life insurance both fall into the category of permanent protection or coverage, the differences between the two lie in how the cash value accumulates. As regards to universal life insurance policy, the policyholders or insurance company issuing the policy establishes an interest rate minimum, stated within each individual agreement or contract. Should the insurance company's portfolio outperform the minimum interest rate, excess return or earnings may be applied to the cash value of a policy. The potential to return or earn more than the minimum crediting interest rate differentiates universal life insurance from whole life.
As the cash value accumulates over time, the policyholders can access a portion of the balance without affecting the Premiums (guaranteed death benefit). Life insurance policy loans permit or allow policyholders to borrow against accumulated cash value within a universal life policy without any tax implications. However, any policy loan not refund may reduce the total death benefit (face amount) issued to benefactors. Cash value may also be accessed as a withdrawal, but the policyholder may incur a tax disadvantageous or liability in doing so.
Final Expense Life Insurance Coverage: Final expense life insurance protection or coverage is often called burial insurance and is acquired or purchased by those who are considered “seniors,” or between the ages of 50 and 85 – although there are some insurance companies who will sell policies to applicants who are older.
This type of protection or coverage is typically geared towards those who want to ensure that their loved ones will not be saddled with the high cost of a funeral and other related expenses such as a memorial service, flowers, headstone, and burial.
Final expense protection or coverage can be either permanent or term –the premium cost for this type of protection or coverage is usually cheaper , even though the applicants are usually older and often times the underwriting requirements are not stringent.
Survivorship Life Insurance Coverage: With a survivorship life insurance policy, there is more than one person that is protected or covered. These policies can be set up in a couple of different ways. One way is first to die. With this category or type of policy, the protection or coverage is designed to pay out when the first person dies or passes away.
In most cases, the specific periodic amounts (premium) that is charged for this category or type of policy can be higher than for a policy on just one insured. However, it can often be less than acquiring or purchasing two separate life insurance policies.
There are also, last to die life or joint and survivor insurance policies. With these policies, the protection or coverage pays out when the second person on the coverage dies (passes away). These can either be termed permanent protection or coverage.
These policies can also have other benefits or advantages, too, in that they typically will cost less than two separate life insurance policies, and they may have less strict underwriting criteria – especially if one of the individuals is in very good health.
No Medical Exam Life Insurance Coverage: As its name implies, no medical exam life insurance protection or coverage will not require that an applicant undergoes a medical examination as a part of the underwriting process. In many instances, when applying for life insurance, applicants (individuals) must meet with a paramedical expert or professional who will question (ask) them in-depth health questions, and will also take from them a urine and a blood sample.
Because of this, those who have certain types of adverse health conditions may be denied for the life insurance that they need. But, with no medical exam protection or coverage, they could be approved for the coverage that they need – and, because there are no medical unbinding or underwriting requirements to contend with, these policies are often granted or approved within just a day or two after submission application.
Permanent Life Insurance Coverage: Permanent life insurance is different from term insurance because it offers both cash value, as well as a death benefit protection component. It also differs because, as the name suggests, it does not have a time duration or limit like term insurance, but rather is aimed to last for the remainder of the insured's lifetime – provided that the specific periodic amounts (premium) are paid. There are various different types of permanent life insurance.
Variable Life Insurance Coverage: Variable life insurance is also a form of permanent life insurance Protection or coverage. These types of life insurance policies offer a cash component, as well as death benefits. However, with variable life insurance, the policyholder can take part in a variety of different investment options such as equities.
This means that there can be more risk as funds are exposed to the ups and downs of the equities market. It also means that their funds have the opportunity to grow a great deal more than the funds in a whole life policy can. It is necessary or important to note that while the policyholder can increase their funds based on market movements, their money or cash is not invested directly in the market. Rather, it is used or invested in “sub-accounts” by the insurance company.
With a variable life insurance policy, the face amount benefit may go up or down – however; it will not go below the set covered or guaranteed amount. This is usually the exact or the original amount of death benefit that is purchased at the time of policy application.
Variable Universal Life insurance is similar to usual or regular universal life insurance protection or coverage, except in this case, the policyholder is allowed to invest the cash in their policy into different types of investments such as mutual funds. Also, there will be no protection or guaranteed minimum cash value in this type of policy.
Decreasing and Increasing Term Life Insurance Coverage: On some category or types of term life insurance, the face amounts or death benefit will go down over time. These are call decreasing term life insurance policies. Thespecific periodic amounts, or premium, however, will usually remain the same). With this policy, the policy ends when the face amount or death benefit reaches zero.
An individual may want to acquire or purchase a decreasing term life insurance policy to cover the balance of their unpaid mortgage. Every year, as the amount of the mortgage balance decreases, so does the amount of the insurance protection or coverage – until eventually both will end.
There are also term policies where the face amount or death benefit increases over time. Often, this benefit will be acquired or purchased at a cost of living rider on the policy. A young family may consider this type of policy as their coverage needs increase.
The best life insurance companies provide some of the outstanding polices in the insurance sector and one can be sure of their policy coverage. However, it can be disappointing at times to realize that the premiums were never paid as stipulated in the policy. What is so important is for us to know what is life insurance about, how life insurance works and to take advantage of the benefits it possess.
“If you are thinking about the best ways to secure the future of your family (while you are gone), think life insurance.”