Provisions should be made for your family ahead of time so as to protect and provide for them in the event of any eventualities. This can help relieve them from stress in the event of your demise as the breadwinner, and this is where life insurance comes in.
Life insurance is essential if you have children or other people that depend on you.
What is Life Insurance?
Simply put, life insurance is a service provided to you by an insurer, in exchange for a regular payment. It is a contract between an insurer and policyholder, where the insurer guarantees payment of a death benefit to named beneficiaries in the event of the demise of the insured.
Here, the insurance company promises a death benefit in consideration of the payment of premium by the insured, which is often calculated with a free asset ratio.
Who is a Life Insurance Beneficiary
A beneficiary is a person named by the buyer of a policy. This person receives the payment in the event of the insured demise.
Why do you need Life Insurance?
- To provide financial protection to your surviving dependents in the event of your demise as the insured.
- To keep you prepared in the event of any eventualities.
How Life Insurance Works
This is the amount of money the insurance company guarantees to the beneficiaries identified in the policy upon the demise of the insured. The insured is at liberty to choose their needed death benefit amount depending on the estimated future needs of surviving heirs. The insurance company then decides whether there is an insurable interest and if the insured qualifies for the coverage depending on the company’s underwriting requirements.
Premiums are payments set using actuarially based statistics. The insurer determines the cost of insurance (COI), or the amount needed to cover mortality costs, administrative fees, and other policy maintenance fees. Other factors that also influence the premium are the insured’s age, medical history, occupational hazards, as well as personal risk propensity. The insurer then remains obligated to pay the death benefit if premiums are submitted as needed.
The cash value of Permanent or Universal life insurance serves two purposes. This is a savings account, that can be utilized by the Policyholder, during the life of the insured, with cash accumulated on a tax-deferred basis. Some policies may have restrictions on withdrawals based on the use of the money withdrawn. The second purpose of the cash value, on the other hand, is to offset the rising cost to offer insurance as the insured ages.
Types of Life Insurance
Term life insurance
This covers a limited time frame, like 10, 20, or 30 years, and does not build cash value. Thus if you die within the term, your beneficiaries get the payout.
Permanent life insurance
Permanent life insurance is more expensive than term life but offers additional features like cash value which you can borrow against and grows over time. There’s also Whole life which is the best-known form of permanent life insurance.
Other types of life insurance include universal, variable and variable universal.
How to buy life insurance
Decide on what you want
Your family needs and priorities largely determine the amount of life insurance you need. It is a good step to have your own policy even if your employer offers one. This is because the policy offered by your employer may not likely be enough to meet your family’s financial needs and typically ends if you quit the job.
You can use debt and income replacement calculators to decide how much coverage you need before you get life insurance quotes.
Evaluate life insurance companies
Check for insurers with good financial strength through rating agencies.
Research and gather the information you need
You will need some documents when applying for life insurance. They may include your current and past health conditions and your family health history. The insurer may also require your consent to get medical records and may ask you to take a life insurance medical exam.
Compare life insurance quotes
Compare all your options, to help you make an informed decision. Look for the best rate, compare life insurance quotes from several companies. Prices may differ widely, based on the type of coverage you opt for and personal factors like your age, gender, and health.