Human life is subject to risks of death and
disability due to natural and accidental causes.
When human life is lost or a person is disabled
permanently or temporarily, there is a loss of
income to the household. The family is put to
hardship. Sometimes, survival itself is at stake for the dependants. Risks are unpredictable.
Death/disability may occur when one least
expects it. An individual can protect himself or
herself against such contingencies through life
insurance. It is not necessary that the insurer is the sole
beneficiary of the policy. In most of the cases
the relative of the insurer/business partners of
the insurer have certain interests in the policy. What is life insurance?
Life insurance is a contract between an insured
(insurance policy holder) and an insurer,
(Insurance company) wherein the insurer
promises to pay a designated beneficiary a sum
of money (the benefits) upon the death of the insured person. Depending on the contract,
other events such as terminal illness or critical
illness may also trigger payment. The policy
holder typically pays a premium, either
regularly or as a lump sum. Other expenses
(such as funeral expenses) are also sometimes included in the benefits. Life insurance is a form of insurance that pays
monetary proceeds upon the death of the
insured covered in the policy. Essentially, a life
insurance policy is a contract between the
named insured and the insurance company
wherein the insurance company agrees to pay an agreed upon sum of money to the insured’s
named beneficiary, so long as the insured’s
premiums are paid current. Though human life cannot be valued, life
insurance products provide a definite amount
of money to the dependants of the insured in
case the insured dies during his active income
earning period or becomes disabled on
account of an accident causing reduction/ complete loss in his income earnings. Why you should insure your life
People take out life insurance policies for a
number of reasons. Such insurance provides
security to family members upon the loss of a
loved one. For instance, if the primary wage
earner dies in his or her prime, the death benefit received from the policy will assist the
surviving family members in overcoming the
burden of the tragic loss. The proceeds can also
help pay for funeral costs when the death is
unexpected. File photo: A victim of an explosion Advantages of a life policy
The advantage of a life policy is peace of mind,
in knowing that the death of the insured
person will not result in financial hardship for
loved ones and lenders. Also, it is possible for life insurance policy
payouts to be made in order to help
supplement retirement benefits; however, it
should be carefully considered throughout the
design and funding of the policy itself. Types of life policies
Life insurance may be divided into two basic
classes; temporary and permanent; or the
following subclasses: term, universal, whole life
and endowment life insurance. Term insurance
Term assurance provides life insurance
coverage for a specified term. The policy does
not accumulate cash value. Term is generally
considered ‘pure’ insurance, where the
premium buys protection in the event of death and nothing else. Three key factors to be
considered in term insurance are; face amount
(protection or death benefit); premium to be
paid (cost to the insured), and length of
coverage (term). Permanent life insurance
Permanent life insurance is life insurance that
remains active until the policy matures, unless
the owner fails to pay the premium when due.
The policy cannot be cancelled by the insurer
for any reason except fraudulent application, and any such cancellation must occur within a
period of time (usually two years) defined by
law. A permanent insurance policy accumulates a
cash value, reducing the risk to which the
insurance company is exposed, and thus the
insurance expense over time. This means that a
policy with a million dollar face value can be
relatively expensive to a 70-year-old. The owner can access the money in the cash value
by withdrawing money, borrowing the cash
value, or surrendering the policy and receiving
the surrender value. The four basic types of permanent insurance
are whole life, universal life, limited pay and
endowment. Whole life coverage
Whole life insurance provides lifetime death
benefit coverage for a level premium in most
cases. Premiums are much higher than term
insurance at younger ages, but as term
insurance premiums rise with age at each renewal, the cumulative value of all premiums
paid across a lifetime are roughly equal if
policies are maintained until average life
expectancy. Part of the insurance contract stipulates that the
policyholder is entitled to a cash value reserve,
which is part of the policy and guaranteed by
the company. This cash value can be accessed
at any time through policy loans and are
received income tax free. Policy loans are available until the insured’s death. If there are
any unpaid loans upon death, the insurer
subtracts the loan amount from the death
benefit and pays the remainder to the
beneficiary named in the policy. Universal life coverage
Universal life insurance is a relatively new
insurance product, intended to combine
permanent insurance coverage with greater
flexibility in premium payment, along with the
potential for greater growth of cash values. A universal life insurance policy includes a cash
value. Premiums increase the cash values, but
the cost of insurance (along with any other
charges assessed by the insurance company)
reduces cash values. Universal life insurance addresses the
perceived disadvantages of whole life – namely
that premiums and death benefit are fixed. With
universal life, both the premiums and death
benefit are flexible. Except with regards to
guaranteed death benefit universal life, this flexibility comes with the disadvantage of
reduced guarantees. Limited pay
Another type of permanent insurance is
Limited-pay life insurance, in which all the
premiums are paid over a specified period after
which no additional premiums are due to the
policy in force. Common limited pay periods include 10-year, 20-year, and are paid out at
the age of 65. Endowment policy
Endowments are policies in which the
cumulative cash value of the policy equals the
death benefit at a certain age. The age at which
this condition is reached is known as the
endowment age. Endowments are considerably more expensive (in terms of
annual premiums) than either whole life or
universal life because the premium paying
period is shortened and the endowment date is
earlier. Endowment insurance is paid out
whether the insured lives or dies, after a specific period (e.g. 15 years) or a specific age
(e.g. 65)