Life Insurance
Life insurance is a contract between the insurer and the insured where the insurer agrees to pay an agreed sum of money to a designated beneficiary upon the death of the insured. In return, the insured agrees to pay a sum of money to the insurer called a premium either in a lump sum or at periodic intervals of time. Unlike other forms of insurance, where the event being insured against such as fire or flood may or may not happen, in the case of life insurance, the event is bound to happen at some point in time. This is why in some countries, life insurance is referred to as assurance and the two terms are often interchangeably used. Adequate life insurance should provide the surviving family of the insured with adequate replacement income and cover other costs such as funeral costs, children’s education, and spouse’s retirement and so on. Your spouse or family can generally use the insurance payout for any purpose they choose without restriction.
Some types of life insurance policies such as permanent life insurance have a cash value that the insured can access either by encasing the policy or borrowing against it. This is attractive but many experts regard this as a secondary aspect of life insurance and consider that the protection and peace of mind that life insurance provides both the insured and his family are the primary purpose. If you choose not to obtain coverage for yourself, the consequences could be financial hardship for your spouse and your family as they struggle to make ends meet without your income coming in.
In order to safeguard the insurer, specific exclusions may form part of the insurance policy and these could include claims relating to suicide or fraud, for instance. Generally speaking, life insurance policies fall into two categories. In the first category, called protection policies, the insured seeks to protect the family from the consequences of his death by seeking an insurance contract that pays out a lump sum. This is also referred to as term insurance. In the second category, called investment policies, the main goal of the insured is to seek the growth of his capital either by way of paying a lump sum premium or by paying a premium at regular intervals. These are sometimes called whole life or universal life policies.
For coverage, please read Life Insurance coverage for details
Life insurance may also be categorized in the following way:
- Term insurance is coverage that is provided for a specified term in return for a specified premium. There is no cash value and protection is only provided in the event of death. The three main factors involved are the protection or the payout, the premium and the term of the insurance. The term can vary anywhere between one year and 35 years.
- Permanent life insurance remains valid until it pays out unless there is a lapse in payment of the premium. In this kind of coverage, substantial cash values can build up and the insured can cash in by withdrawing cash, obtaining a loan against the policy or by surrendering the policy back to the insurer and receiving the surrender value in cash. The most common kinds of permanent insurance are universal life, whole life, limited pay and endowment policies.
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