WHAT IS LIFE INSURANCE?

What Is Life Insurance?

Life insurance is a type of insurance contract between an Insurer and a policyholder. It is a legally binding contract that pays death benefit to the policyholder’s beneficiaries upon death or after a set number of years. The policy guarantees that the insurance company pays a sum certain to the beneficiaries when the policyholder dies in exchange for the premiums of the policyholder during his lifetime.

For this policy to remain in force, the Policyholder must pay a single premium upfront or pay regular premiums over time. And upon death, the policy’s beneficiaries will receive the policy’s financial face value or death benefits.

Types

Many types of life insurance policies are available to meet all sorts of needs and preferences of policyholders. However, this is  dependent on the short or long-term needs of the policyholder. Here are some of the types;

Term life insurance

Term life insurance lasts a certain number of years. You choose the term of years of your choice when you take out the policy. The terms may be 30, 20 or 10 years. There are types of term life insurance policy as discussed under.

Decreasing term

This is a class of term life insurance with coverage decreasing over the life of the policy at a certain  rate.

Convertible term

This type of term life insurance can allow policyholders to convert a term policy to permanent life policy.

Renewable term 

This type of term life insurance provides a quote for the year the policy is purchased. Premiums increase annually and are usually the least expensive term insurance in the beginning.

PERMANENT LIFE INSURANCE

Permanent life insurance is a type of life insurance policy that lasts for entire life of the policyholder unless he stops paying the premiums or surrenders the policy. It’s typically more expensive than term life policy.

Types of permanent policy

Whole life permanent term 

This is a type of policy that accumulates cash value. The cash value is like savings account which the policyholder can use for many purposes, such as a source of loans or cash or to pay policy premiums.

Universal Life permanent policy

This is a type of permanent policy with a cash value component that earns interest. Universal life features flexible premiums. Unlike term and whole life, the premium is adjustable from time to time and with a level death benefit or an increasing death benefit.

Variable universal

This class of permanent policy allows the policyholder to invest the cash value of his policy in an available separate account. It also has flexible premiums and with a level death benefit or an increasing death benefit.

Factors that influence Premiums and Costs

1. Age: This is the most important factor because life expectancy is the biggest determinant of risk for the insurance company. The younger the policyholder, the lower the premium payable and vice versa.

2. Lifestyle: Dangerous lifestyles can make premiums much more expensive, eg. smokers.
3. Gender: Because women statistically live longer, they generally pay lower rates than males of the same age.
4. Smoking: A person who smokes is at risk for many health issues that could shorten life and increase risk-based premiums. This is in line with the aphorism that smokers are liable to die young.
5. Driving record: A history of moving violations or drunk driving can dramatically increase the cost of insurance premiums.
6. Health: Medical exams for most policies include screening for health conditions like heart disease, diabetes, and cancer and related medical metrics that can indicate risk. The presence of any risk factors will increase your premiums
7. Family medical history: If you have evidence of major genetically inheritable disease in your immediate family, your risk of developing certain conditions is much higher. Life insurance applications generally require personal and family medical history and beneficiary information. You will also likely need to submit to a medical exam. You will need to disclose any pre-existing medical conditions. Thus, the presence of this evidence will increase your insurance premium

Benefits

1. Payouts are tax-free. Death benefits are paid as a lump sum and are not subject to federal income tax because they are not considered income for beneficiaries.

2. Dependents don’t have to worry about living expenses. Most policy calculators recommend a multiple of your gross income equal to seven to 10 years that can cover major expenses like mortgages and college tuition without the surviving spouse or children having to take out loans.
3.  Funeral expenses can be significant and mind blowing but can be taken care of with a burial policy or with standard term or permanent life policies.
4.  Permanent life policies such as whole, universal, and variable life insurance can offer cash value in addition to death benefits, which can supplement other savings in retirement.

Who needs life insurance?

Life insurance is most useful for people who need to provide security for a spouse, children, or other family members in the event of their death. Its death benefits, depending on the policy amount, can help beneficiaries pay off a mortgage, cover college tuition, or help fund retirement. Permanent policy also features a cash value component that builds over time.

Life insurance is available to anyone, but the cost or premium level can differ considering the risk level an individual presents on the basis of factors like age, health, and lifestyle. Some category of persons who may need life insurance includes;

1. Young adults whose parents secure private student loan debt or co-signed a loan for them.
2. People with pre-existing conditions such as diabetes, smoking or cancer. Note, however, that some insurers may deny coverage for persons with these condition or charge very high premiums on them.
3. Businesses with key employees
4. Parents with little children
5. Adults who own property together whether married or not. So that if the death of one adult would mean that the other could no longer afford loan payments, upkeep, and taxes on the property, this policy will step in to help.
6. Parents with special-needs adult children
7. Married pensioners
8. Wealthy families who expect to owe estate taxes. The insurance policy will provide funds to cover the taxes and keep the full value of the estate intact.
9. Families who can’t afford burial and funeral expenses. And so on

Conclusion

Life insurance is an integral part of insurance policies with numerous benefits listed above. It is advisable you buy your own today for the benefits of your dependents.