Life insurance should be considered in each and every household. Here are five things to make understanding life insurance easier.
If anyone relies on you financially, you need life insurance
If you have a spouse or are the parent of a dependent child, you should have life insurance. You may also need life insurance if you are:
- Someone’s ex-spouse
- A life partner
- The sibling of a dependent adult
- A child of a dependent parent
- An employee, employer, or a business partner
If you are stably retired or financially independent, where no one would suffer financially if you were to die, you do not need life insurance.
Life insurance does not simply apply a monetary value to someone’s life
Instead of adding a monetary value to someone’s life, life insurance helps compensate for any financial consequences and lessen financial burdens that could result from the loss of life. It helps the loved ones left behind to cover any financial expenses, such as:
- Final expenses
- Outstanding debts
- Educational expenses
- Lost income
Life insurance is a policy
Life insurance is a contract, called a policy. The policy is between the life insurance company and the person who is getting the insurance. The company pools the premiums of policyholders and pays out claims in the event of a death. The insurance company’s profit comes from the difference between the premiums taken in and the claims paid out.
There are four people in a policy
The four people who are involved in a life insurance policy are:
- The insurer
- The owner
- The insured
- The beneficiary
The insurer is the insurance company. They are responsible for paying out claims in case of death. The owner is the person responsible for premium payments to the insurance company. The insured is the person who the policy is based on. Finally, the beneficiary is the person or other entity who will receive the insurance claim in the case of the passing of the insured. A person can be both the owner and the insured of a life insurance policy.
There are two varieties of life insurance
There are two broad types of life insurance, term life and permanent life.
Term life is the simplest and least expensive form of life insurance. This type of insurance is based on the probability that the insured will pass in a specific period of time. This is typically ten, twenty, or thirty years. After that period, you can either let the insurance policy lapse or you can continue to pay for it yourself, which can mean premiums for a length of time.
Permanent life insurance includes the probability-of-death calculus and a savings mechanism. These policies are referred to as “cash value” and are designed to exist forever. There are a few different forms of permanent life insurance. Whole life is the original form, which has an investment component similar to bonds. Variable life offers investment options similar to mutual funds. Finally, universal life is designed to be a less expensive permanent life insurance alternative. However, it has an increased interest rate risk.