Life insurance helps people fulfil their financial goals and combat stressful situations. One of the most common uses of life insurance is to assist the family of the policyholder in case of his death. Life insurance can also be used to fund certain goals such as education of children or grandchildren. With the help of this article, we will get an idea about what insurance is, its types and functioning.
Defining life insurance
Life insurance is a type of agreement between two parties. That is the person who takes the insurance and company that provides the insurance. The person who buys the insurance has to pay a regular premium that is a fixed amount of money periodically and in return the company who is providing the insurance promises to pay a fixed amount depending on the type of policy purchased to the family of the policy if he dies.
Why is life insurance needed?
It is very important to understand the need for taking life insurance. For example, if a person is the only earning member in the family and he dies, then it would be very difficult for his family to survive and even get the basic necessities. But if the person has taken life insurance then it would be easy for his family to survive. Although life insurance could not replace all the income, it would help the family members to live an easier life.Also, life insurance provides the money needed for the funeral and covers other expenses like debt repayment.
Types of Life Insurance
Life insurance is basically of two types: Term life insurance which is only valid for a fixed period of time and Permanent life insurance which provides coverage for the entire life.
Term life insurance
The term life insurance provides coverage only for a specific period of time like 10 years, 20 years or more. When this period is over you need not to pay the premiums and your policy is expired. As the policyholder has to pay the premium for a specific period, this type of life insurance is best suited for anyone looking for low cost coverage. If someone is planning a family, then taking a20 or 30 year policy would be beneficial as it will support the children financially through college graduation.
Permanent life insurance
Permanent life insurance is a whole life insurance in which the policyholder has to pay the premium for his entire life. This type of life insurance provides lifelong benefits to the family. Permanent life insurance term life insurance also provides the death benefits to the beneficiaries. But if you withdraw any amount from your cash value, then there will be a reduction in the amount that beneficiaries will get.
Permanent life insurance is of different types:
- Whole life insurance
- Universal life insurance
- Variable life insurance
- Variable universal life insurance
- Indexed universal life insurance
- Final expense insurance
- Simplified issue life insurance and,
- Guaranteed issue life insurance
Functioning of life insurance
This will help us to understand the major aspects of life insurance, and the person involved in it.
Policyholder and beneficiary
A policyholder is the person who buys the life insurance and pays the premiums periodically. The policy generally insures the policy holder, but one can also buy a policy on behalf of someone else. For example, you can buy a policy for your spouse while being the policyholder yourself.
Premium
Whenever you buy a policy, you have to pay a fixed amount to the company to keep your policy active. This fixed amount which is periodically paid to the company is called premium. This depends upon many factors such as your age, lifestyle and the amount of coverage you need.
Death benefit
Death benefit refers to the amount of money that the family will receive if the policyholder dies. You can choose how you want to receive the money when you submit a life insurance claim. You can receive money in the following way:
- Lump sum: in this type you receive the entire money in one time.
- Lifetime income: the beneficiaries receive payments every month for their entire life
- Interest income option: the insurance company does not pay the money, but only pays the interest earned to the beneficiaries.
Claim process
To get the death benefit, the beneficiaries need to file a claim with the insurance company. After everything is verified the company pays the claim to the beneficiaries within 30 days.
Conclusion
It is very important to buy life insurance as it protects your family if you pass away. The family of the policyholder does not have to face financial issues after the death of the policyholder as they would have the basic necessities to live their lives. So everyone should first get the detailed knowledge about life insurance, and then buy a protective cover to ensure a happy life for their families.
