people ask that what life insurance is. And they will tell you it is a kind of financial policy that you buy which pays you money to your family when you die or this kind of policy will help the policy makers family in the future in terms of finance. Similarly when we ask about such a questions that speaks a lot for life insurance. Here is the simple concept of life insurance:
Life insurance simply can be explained that it is a statement or legal agreement between an insurance company and a person or legal entity. That contract shows certain promises and legal agreements about financial protections and financial facilities to family of a person who buys life insurance policy from any legal insurance company.
However, Life insurance has positive impact on our lives as it gives the financial protections to the many families.
WHO NEEDS LIFE INSURANCE?
Life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured policyholder. Here are some examples of people who may need life insurance:
Parents with minor children: If a parent’s the loss of their income or care giving skills could create a financial hardship. Life insurance can make sure the kids will have the financial resources they need until they can support themselves.
Parents with special needs adult children: For children who require lifelong care and will never be self sufficient, life insurance can make sure their needs will be met after their parents pass away. The death benefit can be used to fund a special needs trust that a fiduciary will manage for the adult child’s benefit.
Adults who own property together: Married or not, if the death of one adult would mean that the other could no longer afford loan payments, upkeep, and taxes on the property, life insurance may be a good idea. One example would be an engaged couple who take out a joint mortgage to buy their first house.
Seniors who want to leave money to adult children who provide their care: Many adult children sacrifice time at work to care for an elderly parent who needs help. This help may also include direct financial support. Life insurance can help reimburse the adult child’s costs when the parent passes away.
Young adults whose parents incurred private student loan debt or cosigned a loan for them: young adults without dependents rarely need life insurance, but if a parent will be on the hook for a child’s debt after their death, the child may want to carry enough life insurance to pay off that debt.
Children or young adults who want to lock in low rates: The younger and healthier you are, the lower your insurance premiums. A something adult might buy a policy even without having dependents if there is an expectation to have them in the future.
Stay at home spouses: Stay at home spouse should have life insurance as they have significant economic value based on the work they do in the home according to Salary.
Wealthy families who expect to owe estate taxes: Life insurance can provide funds to cover the taxes and keep the full value of the estate intact.
Families who can’t afford burial and funeral expenses: A small life insurance policy can provide funds to honor a loved one’s passing.
Businesses with key employees: If the death of a key employee, such as a CEO, would create a severe financial hardship for a firm, that firm may have an insurable interest that will allow it to purchase a life insurance policy on that employee
Married pensioners: Instead of choosing between a pension payout that offers a spousal benefit and one that doesn’t, pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called Pension Maximization
Those with preexisting conditions: Such as Cancer, Diabetes, or Smoking. Note, however, that some insurers may deny coverage for such individuals, or else charge very high rates.
HOW LIFE INSURANCE WORKS?
Life insurance policies all offer a death benefit in exchange for paying premiums to the insurance provider during the term of the policy. One popular type of life insurance term life insurance only lasts for a set amount of time, such as 10 or 20 years during which the policyholder needs to offset the financial impact of losing income. Permanent life insurance also features a death benefit but lasts for the life of the policyholder as long as premiums are maintained and can include cash value that builds over time.
Followings are 3 main components as under:
Death Benefit: The death benefit or face value is the in the policy when the insured dies. The insured might be a parent, and the beneficiaries might be their children.
Premium: Premiums are the money the policyholder pays for insurance. The insurer must pay the death benefit when the insured dies if the policyholder pays the premiums as required, Premiums are higher on policies with larger death benefits, individuals who are at higher risk, and permanent policies that accumulate cash value.
Cash Value: The cash value of permanent life insurance serves two purposes. It is a savings account that the policyholder can use during the life of the insured the cash accumulates on a tax-deferred basis. Some policies may have restrictions on withdrawals depending on how the money is to be used.
BENEFITS OF LIFE INSURANCE
There are many Benefits to having life insurance below is some of the most important features and protections offered by life insurance policies?
Most people use life insurance to provide money to beneficiaries who would suffer a financial hardship upon the insured’s death. However, for wealthy individuals, the tax advantages of life insurance, including the tax-deferred growth of cash value, tax-free dividends, and tax-free death benefits, can provide additional strategic opportunities.
- Financial Protection
- Avoiding taking any financial risk
- Insurer family financial opportunities
TYPES OF LIFE INSURANCE
Many different types of life insurance are available to meet all sorts of needs and preferences. Depending on the short- or long-term needs of the person to be insured, the major choice of whether to select temporary or permanent life insurance is important to consider.
Term life insurance
Term Life insurance lasts a certain number of years, and then ends. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. The best term life policies balance affordability with long term financial strength.
- Decreasing Term Life Insurance: decreasing term is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate.
- Convertible Term Life allows policyholders to convert a term policy to permanent insurance.
- Renewable Term Life Insurance is a policy that 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 insurance stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. It’s typically more expensive than term.
- Whole Life: This type of policy insurance is a type of permanent life insurance that accumulates cash value. Cash Value life insurance allows the policyholder to use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums.
- Universal Life: A type of permanent life insurance with a cash value component that earns interest, Universal Life features flexible premiums. Unlike term and whole life, the premiums can be adjusted over time and can be designed with a level death benefit or an increasing death benefit.
- Indexed Universal: This is a type of universal life insurance that lets the policy holder earn a fixed or equity indexed rate of return on the cash value component.
- Variable Universal: With this type of life insurance, the policyholder is allowed to invest the policy’s cash value in an available separate account. It also has flexible premiums and can be designed with a level death benefit or an increasing death benefit.