How Life Insurance Works
How Life Insurance Works. In life, there is no certainty, except death. And because we do not know exactly how things will turn out in our lives – whether we will be able to work and live long enough in order to leave a size-able amount of inheritance to our family or if we are going to meet some unforeseen event that will leave our families with all the mortgage and amortization payments to fulfill – it is important to make plans and ensure that our families will not be carrying any financial burdens as they grieve their loss.
Life insurance serves exactly this purpose. Life insurance is your family’s shield from any financial burdens you may currently be shouldering as the breadwinner in the instance of your sudden death.
A lot of people wonder how life insurance really works – what is the basis of the premium payments, the mechanics of the different types of policies and the like. When you consult with an insurance agent, all these should be made clear to you prior to your purchasing a policy, but here are the basics.
Facts about Life Insurance
- Life insurance is a contract you enter with an insurance company that requires you to make monthly, quarterly or annual premium payments with the promise that upon your death, the company will pay your beneficiaries the agreed face amount of your life insurance.
- A person takes out life insurance mostly to ease the financial burdens on his or her family upon his death. It is meant to cover any remaining hospital care bills, burial expenses, and any remaining mortgage payments. Other reasons to take out life insurance could include temporarily providing income to replace what has been lost and having a legacy fund for children.
- Premium payments are calculated by actuaries based on several factors. These include age, gender, the current state of health, lifestyle, and the type of work involved. These are determined via tests and questionnaires that you have to fulfill before being presented with a policy. The more risks there are on your life, the higher the premium payments will be. Smokers usually have higher premium payments compared to non-smokers, so do people who have pre-existing medical conditions.
- The younger a person is the lower the premium payments will be so that most agents and financial advisers suggest that it is best to take out life insurance while young and when one is facing the greatest amount of financial obligations.
- Premium payments also vary depending on whether you pay on a monthly, quarterly or annual basis. Annual payments result in an overall lower premium compared to monthly payments.
- Beneficiaries are people chosen by the insured party to receive the amount of insurance upon death. This is usually the immediate family, but could also include other relatives who may be shouldering some of your financial burdens.
- There are various types of insurance policies, the most common being term life insurance and whole life insurance.
The Basics of Term Life Insurance
Term life insurance is a policy that covers only a specific period in the insured party’s life. This could range from a year, five years or more. Once the covered period has lapsed, you need to renew it to keep yourself covered. If the insured party dies outside of the covered period of the life insurance, the beneficiaries will not receive any payment.
Most people would suggest taking out term life insurance as opposed to whole life insurance because premium payments to these are cheaper and provide coverage only for the period of time that you truly need to be covered, that is when your financial obligations are high and you do not want to leave them to your family when you die. Term life insurance could also be converted to whole life insurance, should the insured party choose to do so.
The Basics of Whole Life Insurance
Whole life insurance is one that covers a person for the whole duration of his or her life, or at the least up to a very advanced age. With whole life insurance, the insured party gets to cash out the face amount of the policy upon maturity. Whole life insurance also provides the benefit of never having to be bothered about renewal and risking death outside of a covered period.
Whole life insurance is also sometimes referred to as an investment plan. This is because premium payments that are used by the insuring company in their investments also earn dividends for the insured party. These dividends can be accumulated to serve as premium payments in later years or to be cashed out whenever you need the money in case of an emergency.
Premium payments for whole life insurance are normally higher than that of term life insurance and for this reason, people tend to shy away from taking whole life insurance.
On the whole, however, any insurance is better than none. Therefore, it is best to take a policy as early as you can and to shop around first before locking yourself into policy, so that you are ensured of getting the best value life insurance for the money that you pay.