Life Insurance Policy: Life is associated with Uncertainty. As such, it is advisable that you take certain necessary precautionary measures towards ensuring that you are not taken unawares. One of such measures is life insurance.
When people purchase life insurance policies, they pay premiums. In exchange, when they die their beneficiaries will be provided with death benefit payouts in the form of a lump sum from the insurance company.
What the above means is that life insurance is a way to help the people you love if you die. Especially if they depend on you financially, whether wholly or partially.
What is Life Insurance?
Life insurance is a contract between an insurer and a policyholder. The insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company promises a death benefit in consideration of the payment of premium by the insured.
In another sense, life insurance is considered to be a contract between an insurance policyholder and an insurer. Here the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium upon the death of an insured person.
Understanding Life Insurance
The purpose of life insurance is to provide financial protection to surviving dependents after the death of an insured. Always analyze your financial situation and determine the standard of living needed for your surviving dependents before purchasing a life insurance policy.
Life insurance agents are instrumental in assessing needs and establishing the type of life insurance most suitable to address those needs. Several life insurance channels are available including whole life, term life, universal life and variable universal life (VUL) policies.
Not all types of life insurance policies are the same. When someone talks about life insurance as an investment, they are typically referring to permanent life insurance. This can accumulate cash value, as opposed to term life insurance.
Some Components of Life Insurance Policy
There are three major components of a life insurance policy. They are as follows;
Death benefit is the amount of money the insurance company guarantees to the beneficiaries identified in the policy upon the death of the insured. The insured will choose their desired death benefit amount based on estimated future needs of surviving heirs.
The insurance company will determine whether there is an insurable interest. This is if the insured qualifies for the coverage based on the company’s underwriting requirements.
These are set using actuarial based statistics. The insurer will determine the cost of insurance (COI). Or the amount required to cover mortality costs, administrative fees, and other policy maintenance fees.
Other factors that influence the premium are the insured’s age, medical history, occupational hazards, and personal risk propensity. The insurer will remain obligated to pay the death benefit if premiums are submitted as required.
With term policies, the premium amount includes the cost of insurance (COI). For permanent or universal policies, the premium amount consists of the COI and a cash value amount.
This is a component that can serve more than one purpose. It is a savings account which can be used by the policy holder during the life of the insured, with cash accumulated on a tax-deferred basis.
Some policies may have restrictions on withdrawals depending on the use of the money withdrawn. The second purpose of the cash value is to offset the rising cost or to provide insurance as the insured ages.
Some Types of Life Insurance
The following are some of type life insurance;
Term Life Insurance
Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy. This is usually from one to 30 years. Most term policies have no other benefit provisions.
Term life insurance policy is divided into the following: Level term (which means that the death benefit stays the same throughout the duration of the policy). And decreasing term (which means that the death benefit drops, usually in one-year increments, over the course of the policy’s term).
Whole life Insurance
This is sometimes called permanent life insurance. It encompasses several sub-categories, including traditional whole life, universal life, variable life and variable universal life.
Whole life or permanent insurance pays a death benefit whenever you die, even if you live to 100 years. There are three major types of whole life or permanent life insurance, they are; traditional whole life, universal life, and variable universal life, and there are variations within each type.
In this insurance policy also you can borrow against the cash value to buy a house or send your kids to college without paying taxes or penalties. You can also use the money you put in a savings account to buy a house or send your kids to college.
However, despite the disadvantages of life insurance, you should know that when you use permanent life insurance as an investment, you do not pay taxes until you withdraw the money, and you can keep the policy until age 120, as long as you pay premiums on time.
You can also borrow against the cash value to buy a house or pay for your children’s college costs. You can receive some of your policy’s death benefit while you are alive if you develop certain medical conditions.
With term life insurance, all of your payments are put toward the death benefit for your beneficiaries, with no cash value. This means small premiums in exchange for a large death benefit.
For most people with basic financial needs and no complicated financial assets to protect, whole life insurance is not a good investment. That advice also applies to variable life insurance and universal life insurance products.
Whole life insurance can come with high premiums and high investment costs when dealing with variable universal life insurance. Many times, an investor can find substantially less expensive investment options outside of life insurance.
The longer the investment time frame, the more important these investment costs become. The insurance company is expecting the premium you commit to each year, and they are not very flexible. Your policy could lapse if you lose your job and cannot make premium payments.
Also, if you are a policyholder with term life insurance, you can lose what you have paid in as the policy typically expires before you can file a claim.
In a Nutshell
From the above, therefore, it is pertinent to say that when considering whether to invest in any life insurance policy, take into consideration their advantages and disadvantages. This is to guide and inform you towards making the right decision.