Life Insurance is a financial cover for a contingency linked with human life, like death, disability, accident, retirement etc. It’s an agreement between you (the insured) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your monthly or annual premium payments.
Others buy life insurance as a way to leave a cash gift to their spouse, children, grandchildren, and charities at their death.
The policy is written on the life of a person, known as the insured. The owner makes payments, known as premiums, to the insurance company for the policy.
Life Insurance Contract
A life insurance contract is made up of legal provisions, your application (which identifies
who you are and your medical declarations), and a policy specifications page that describes
the policy you have selected, even in the case of low-cost life insurance.
The policy specifications page describes the amount to be paid upon your death and the
amount of premiums required to keep the policy in effect in order to avoid some shocking insurance claims in the future.
Life Insurance Policy Types
Term insurance is the most basic type and probably the cheapest life insurance. The policy is written for the term of the policy, usually from one to 30 years and has the least premium as compared to other life insurance and critical illness cover policies.
If the insured dies within the stated term, the insurance company pays the death benefit to the beneficiary. When the term ends, the insurance ends.
Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.
A whole-life policy pays a death benefit no matter when the insured dies. In most cases, the policy will guarantee the death benefit.
You pay a fixed premium (monthly or annual payment) and get a fixed death benefit (the amount of money provided when you die) for life and is quite an affordable life insurance.
Whole-life works well for those who want a guaranteed death benefit no matter how long the insured lives, and who have enough money to pay the premiums It is also an ideal way of creating an estate for your heirs as an inheritance, however, this policy should not be confused with family life insurance.
Universal life, also known as adjustable life, allows more flexibility than traditional whole life policies. However, a universal-life policy gives the policy owner the choice of changing the premium and even the death benefit.
You may pay premiums at any time, in any amount (subject to certain
limits), as long as policy expenses and the cost of insurance coverage are met.
The amount of insurance coverage can be changed, and the cash value will grow at a
declared interest rate, which may vary over time.
Variable life policies combine death protection with a savings account that can be invested in stocks, bonds and money market mutual funds.
These funds may allow the cash value to grow at higher rates than fixed-rate whole-life or universal-life policies.
The value of the policy may grow more quickly, but involves more risk like it is for business life insurance and it is also advisable to be aware of the different types of insurance frauds. If investments do not perform well, the cash value and death benefit may decrease.