Table of Contents
What Is Life Insurance?
Life insurance is a contract between the insured and the life insurance company to pay a certain lump sum amount of money to the beneficiaries if the insured dies or pay the insured themselves upon expiry of a specified period in exchange for payment of premium. The beneficiaries may be a spouse or sibling of children to the Insured who may use the amount from the death benefit as they opt.
Why Life Insurance?
Over the years, insurance has spread throughout every aspect of everyday life to aim an important aspect in safeguarding owners’ property. Insurance now is an important tool when dealing with the life of an individuals, who may opt not only to safeguard their property but also as a source of investment when it comes to the insured’s life. Thus, life insurance is a source of investment for the insured, with benefits payable to the insured’s beneficiaries upon expiry of a certain period or till death.
What’s The Difference Between Life Insurance and Life Assurance?
Although the terms life assurance and life insurance may be used interchangeably worldwide, they slightly differ.
Life assurance is an agreement between the policyholder and the assurance company to pay the beneficiaries a lump sum or piecemeal amount upon the policyholder’s death. In this case, death is assured. On the other hand, life insurance is a contract between the insured and the insurance company to pay a lump sum amount to the policyholder after the expiry of the specified period or extend the death benefits to the beneficiaries in case death supersedes. In life, insurance death may or may not occur.
Life Insurance Terms
Sum assured
This is the amount promised to the insured upon the policyholder’s death. This amount should always be higher relative to the insured’s annual income.
Premium
This is the period amount payable to the insurance company to provide insurance cover. This amount is agreed upon by the insured and the Insurance company. Failure to pay premiums may result in the policy being discharged or altering the insurance policy terms.
Maturity
Maturity is when the policy expires after the period elapses. Normally the insured is paid a maturity benefit. Some policies require renewal after maturity.
The death benefit
This is the lump sum amount paid to the beneficiaries, who are also called the nominees, upon the insured’s death.
Riders
Riders are added benefits to a policy to enhance it. These can be purchased with the policy or during the duration of the main policy, and they include:
- Total accident disability benefit
- Death by accident benefit
- Child support benefit
Premium waivers
Premium waivers ensure the policy remains valid and operational if the insured suffers a certain accident.
Grace period
A buffer time where the policy remains active even though no premiums have been paid by the insured is always provided for. This is called a grace period.
Surrender value
If the insured terminates the policy prematurely, an amount from the insurance company is usually given back to the insured, depending on the policy terms.
What Are the Major Types of Life Insurance?
1. Term life insurance
This is a type of life insurance where the policy has a specified expiry date.
Normally rates stay the same during this period. The cover periods may vary depending on the policyholder and maybe 5, 10,20 years. This type of insurance is ideal for people who want insurance to cover debts or certain situations for a specific period.
2. Whole life insurance
This provides cover for the policyholder for as long as they live. Such a policy guarantees that the policy’s cash value will earn an interest that is fixed, all death benefits will remain unchanged, and the premiums will not increase.
3. Universal life insurance
It is a permanent life insurance but generally cheaper than whole life insurance, given they do not offer certain guarantees as whole life.
4. Variable life insurance
This type of insurance offers a permanent cover with cash value.
The insured may choose the in which areas to an investor. Such a decision determines the amount the cash value grows at. This policy is suitable for individuals who want to take roles actively in their life insurance investments.
5. Survivorship life insurance
This is a joint insurance policy that may cover two people, a husband, and a wife. The payout is only made to beneficiaries in case both parents die.
6. Supplemental life insurance
This is a type of insurance that covers an individual through work. It may cover a group of people who work in the same institution, also called group life.
What Are the Factors Determining Life Insurance Premiums?
1. Lifestyle
Less than safe actions may disqualify an individual from getting an insurance claim due to high maintenance of the same.
2. Occupation
Jobs considered high risk usually carry expensive rates and higher premiums than those considered jobs with low risks.
3. History of the family
Some health issues run in certain families, which is crucial to life insurance providers since they may forecast an individual’s future health-wise. These issues may help determine the number of premiums to be paid by an individual.
4. Medical history
Those deemed healthy are generally awarded lower insurance premiums since they are less likely to die when the policy is in force, unlike people considered less healthy. Evidence of chronic diseases may be needed through a medical examination.
5. Age
The older a person is, the more the person is likely to pay higher premiums. Simply put, younger people get better rates because they are less likely to suffer illnesses than older adults. Younger people also tend to choose longer insurance covers compared to older people.
6. Term of the policy
Policies with longer durations have a cheaper premium than shorter life insurance policies.
What Are the Advantages of Life Insurance?
1. Life coverage
Life insurance provides cover for the insured and the family for longer periods ensuring the family is well.
2. Death benefit
Upon the insured’s death, the beneficiaries are left with an amount that can safeguard their future financial needs having claimed the life insurance sum assured plus the many bonuses it may carry.
3. An investment scheme
Life insurance policies act like investments with better yield than other alternative investment avenues. The amounts invested in these policies are safe and free from risks fetching high returns upon expiry.
4. Loan advancement
Life insurance policies provide the insured with policy loans, using their policies as collateral for the loans if the insured is in dire need of money. This amount can be a percentage cash value or the sum assured, depending on the policy terms.
5. Income benefits in case of assurance
The family stays financially secure through the amounts they receive from the insurance company in case of life assurance. The amount may be in lump sum or paid on piece-meal methods.
6. Rider benefits
There are added benefits that can be added or bought plus the policy. These may provide more extensive coverage for the insured and others at large.
What Are the Disadvantages of Life Insurance?
1. Expensive to the old and unhealthy
If you are elderly or diagnosed with complications, it may be expensive to purchase life insurance policies due to the high premiums and overhead costs.
2. Misinformation
Life insurance policies are prone to misinformation from both parties due to the complexities involved in acquiring them and keeping them in force.
3. A weak investment vehicle
The cash value component of a whole life insurance policy becomes a greater way to save money ahead of an individual’s retirement while waiting for the individual to pass away.
4. Exclusion clauses
Life insurance policies do not provide comprehensive covers for all. One may be forced to take two or more other policies to cater for the same.
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