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Insurance in simplest of its definition is compensatory relief against any loss. A typical difference between insurance and aided relief is that in case of insurance the beneficiary has to pay a premium in order to receive the compensation.
Life insurance is sought either for protection purposes or for investment purposes. But the question escalates, what is life insurance and why should you buy it?
Let us dig a little deeper and also understand how to choose one before you buy one.
What is life insurance?
Life insurance is a contract between two parties out of which one is the insuring agency or company. The contract specifies that in the event of the death of the insured person, a nominated beneficiary shall receive a lump sum amount of money as compensation. This is done in exchange for a premium paid by either the beneficiary or the insured individual.
The life insurance policy was initially introduced to help the working-class secure their loved ones after they pass away. Since the returns in life insurance are subtle and guaranteed, it is of equal interest to both, intellects and investors.
How does life insurance work?
Now that you know what life insurance is, it’s the time that you also understand how it works. You must have been advised a gazillion times to compare the cost of your insurance policy before you buy it. The same is true with life insurance as well.
To keep it simple, the insurer charges a premium from the insured in exchange for a promised payment against a contingent situation. The premium to be paid is decided based on various factors including the age of the insured, the family income, tenure of insurance, and, of course, the type of insurance policy. For example, if the insured individual is past forty years of age, it is very likely that the premium to be paid is higher for the same type of policy for someone in their early twenties or thirties. Likewise, all of these factors are interdependent and a series of calculations are followed to decide the amount of premium.
What are the benefits?
As with any insurance policy, the primary motive is to save finances in the event of future contingencies. In a similar manner, life insurance policy is put in place to help cover the expenses for the families that have lost their earning members.
The benefits of life insurance extend way beyond just the life of the insured and the beneficiary. Life insurance has facilitated people with compensating their lost incomes and likewise plan for the estate benefits. For example, this blog post explains the benefits of life insurance for students. In fact, life insurance policies can be flexibly sought to plan future finances.
Another benefit that life insurance offers is tax exemption. Since the compensation is paid collectively at the end of the term or as a death benefit, this allows for flexibility in spending the benefits to the beneficiary as and when required. That is why buying a life insurance policy is not just an investment but offers a lot of other benefits in personal life.
Which policy should I choose?
Knowing what life insurance policy is and buying one, are two different things. A variety of life insurance policies are available in the market. The most common plans bought popularly by Americans include term life insurance, universal life insurance, and whole life insurance. To make a clear-minded, rational buying decision when seeking life insurance, a brief knowledge of what these policies are and how they differ is crucial.
The most important difference between these three plans is the tenure of the policy and the premium to be paid. While the term insurance is valid for a short period of time from a few years to around 20 years, the universal and whole life insurance policies are valid lifelong. Likewise, the premium to be paid for term insurance may be lower during the term, but it can escalate if the term of the policy is altered or extended. Whereas, the premium for whole life insurance and universal life insurance are usually higher in comparison to the terminal policy.
The term policy is beneficial for those who are not looking for any investment but are ensuring safety and financial needs for their loved ones after they pass away. On the contrary, universal life insurance and whole life insurance policies are most suitable for people who are proceeding with their estate planning. More or less, all of these policies can benefit only after the insured is deceased.
Life insurance is not just a piece of contract but also a security patch that can help plan a secure future for your family and loved ones.