Life Insurance - What You Need to Know
Life insurance is quite a broad term but, essentially it is a contract that is drawn up between an insurance agency and a person known as the policy holder. Under the agreement, the policy holder agrees to pay off a certain amount called the premium, periodically. If under any circumstance, the policy holder passes away, then the beneficiary to the insurance policy will receive a lump sum mentioned in the policy as a death benefit.
Life insurance is one of the most common types of insurance that people take today and each insurance policy is tailored according to the goals of the policy holder. The sole purpose of a life insurance policy is financial protection for dependents on the insured. It has become a lifesaver for many people, especially in circumstances of unexpected death or harm.
How Does a Life Insurance Policy Work?
There are three parts to a life insurance policy namely cash value, premiums, and death benefits. Cash value is like a savings account in which, the policy holder accumulates money that is tax-deferred. Premiums are the payments that are to be made by the policy holder while he or she is alive. Premiums are calculated on the basis of statistical data in such a way as to reduce any risk to the insurance agency.
Finally, the death benefit is the amount that the insurance agency guarantees to the beneficiaries of the policy in case the policy holder passes away. Once again, this amount is calculated on the basis of actuarial data. The beneficiaries are entitled to receive the death benefit provided the meet the requirements stated in the policy.
Life insurance policies can oversee a child's education, marriage, retirement, purchase of a home, and so on even after the death of a loved one.
What are the Different Types of Life Insurance?
There are several types of life insurance plans, and a policy holder can choose the policy in which the terms are best suited to his or her needs. Life insurance policies range from temporary benefits to permanent benefits and the cash value, premium, and death benefit varies in each case.
Here is a list of the different types of life insurance and how they differ from each other.
The two basic types of life insurance are term life insurance and whole life insurance.
Term Life Insurance
Term life insurance, as the name suggests, provides death benefits only for a certain term. It can be a few months to a few years. Once the term expires, the life insurance can be renewed again annually. The disadvantage is that the premium increases with the annual renewal. In some cases, the premium can increase thrice as much as what was paid in the beginning.
Typically, a term life insurance is available for 10, 15, 20, and 30 years.
Whole Life Insurance
Whole life insurance is a permanent insurance, which means that the beneficiaries will receive a death benefit whenever you die. In whole life insurance, the premium and the benefit will stay at the same level throughout the life of the policy holder. Since a policy holder who has taken out a whole life insurance policy is required to pay premiums for an indefinite amount of time, insurance agencies usually charge higher premiums during the early years. The premiums are then invested in such a way so that even during fluctuations in interests and taxes, the beneficiaries are entitled to the full amount mentioned in the policy.
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The other types of life insurance policies include the following.
Universal Life Insurance
Universal life insurance is similar to a whole life insurance except that it is flexible when it comes to premiums and death benefits. A person taking out a universal life insurance can pay an additional amount to over fund the policy. This additional money gains value over time through interest and can be used at a later date to manage the costs of the life insurance policy.
The tricky part is that in a universal life insurance, the beneficiaries do not get the full death benefit if the policy holder dies without paying the premiums in full. Also, if the policy holder does not withdraw the over funded amount in his or her lifetime, the insurance agency is not obliged to pay it to the beneficiaries upon the death of the policy holder.
Variable Life Insurance
A variable life insurance is a type of permanent life insurance. The policy also allows the policy holder to invest an additional amount to fund the policy. In a variable life insurance policy, however, the funds are in the form of investment opportunities that are constantly exposed to the market conditions. It is important to note that the policy holders themselves do not invest in the market. It is the insurance agency that makes the investments on behalf of the policy holders.
A variable life insurance has advantages and disadvantages. Since the funds are invested as equities, there is a higher return on the investments than any other policy. But, the funds depend on market conditions which means that the risk with such policies are higher.
Survivorship Life Insurance
Unlike other life insurance policies, a survivorship life insurance can include more than one beneficiary. This avoids the need to purchase two separate policies for two family members. For instance, if a person who has two children is buying a life insurance policy, in most cases, he will have to buy two different policies for each child. With a survivorship life insurance, both his children are included as beneficiaries in a single policy. The advantage is that the policy holder does not have to worry about buying two different policies. The disadvantage is that the premiums on survivorship life insurance are higher than that of normal premiums.
A survivorship life insurance has flexible underwriting conditions, especially if the policy holders are in relatively good health. The policies can be set in different ways as per the requirement of the policy holders.
There are many different types of life insurance. Contact a local broker to learn more about the specific products that might work for your life.