What
is Life Insurance?
A policy that will pay a specified sum to beneficiaries upon the death
of the insured. It is a protection
against the death of the insured in the form of payment to a designated
beneficiary, typically a family member or business.
Suppose say, you are the only member working and earning for your family,
and if something happens to you, what will happen to the family? Will
they have enough money for your funeral, child care, children's education,
etc.,
So the most important reason for life insurance is to protect your family
by making sure that they have enough money if something happens to you.
Life insurance is the foundation of a sound financial plan. It provides
financial security for your family by protecting your financial resources,
such as your present and future income, against the uncertainties of
life. More specifically, life insurance provides cash to your family
after your death. This cash (the death benefit) replaces the income
you would have provided and can meet many important financial needs:
It can run the household, send your kids to college, and ensure that
your dependents are not burdened with debt.
How does Life insurance work?
Each year, you pay the insurance company for your insurance policy,
this money is called a "premium." You also tell the insurance
company who should get the insurance money if you die (a process called
"naming your beneficiaries"). Then, if you die while your
policy is active, the insurance company will pay your beneficiaries
of the insurance money.
Why should you buy Life insurance?
Life insurance protects your family in case something happens to you.
Most people buy life insurance to make sure that their family still
has enough money to take care of things after they die (like debts,
health care). If you buy "permanent" life insurance you can
also save money for the future.
In general, life insurance falls under two categories namely, Term insurance
and Permanent insurance.
Term insurance provides protection for a specific period
of time. It pays a benefit only if you die during the term. Some term
insurance policies can be renewed when you reach the end of the term,
which can be from one to 30 years. The premium rates increase at each
renewal date. Many policies require that your present evidence of insurability
at renewal to qualify for the lowest rates.
Advantages:
Initial premiums generally are lower than those for permanent insurance,
allowing you to buy
higher levels of coverage at a younger
age when the need for protection often is greatest. It’s good
for covering needs that will disappear in time, such as mortgages or
car loans.
Disadvantages:
Premiums increase as you grow older. Coverage may terminate at the end
of the term or become too expensive to continue. The policy generally
doesn’t offer cash value or paid-up insurance.
Permanent insurance provides lifelong protection. As
long as you pay the premiums, the death benefit will be paid. These
policies are designed and priced for you to keep over a long period
of time. If you don’t intend to keep the policy for the long term,
this may be the wrong type of insurance for you.
Some of the features of this policy are
You can cancel or surrender the policy in total or in part and receive
the cash value as a lump sum. If you surrender your policy in the early
years, there may be little or no cash value. If you need to stop paying
premiums, you can use the cash value to continue your current insurance
protection for a specified time or to provide a lesser amount of protection
covering you for your lifetime. You
usually can borrow from the insurance company, using the cash value
in your life insurance as collateral. Unlike loans from most financial
institutions, the loan is not dependent on credit checks or other restrictions.
You ultimately must repay any loan with interest or your beneficiaries
will receive a reduced death benefit.
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