What is life insurance and how does it work? : Life insurance is a contract between you, the policyholder (or applicant), and an insurance company, which promises to pay a specified amount of money upon your death.
The policy usually has an option to choose what happens when someone dies before you do with a survivor benefit or bequest clause. You can also choose how much coverage there is and how long the policy will last before it ends. After that, should you die during that time period and no other heirs exist, the proceeds will go to the company’s beneficiary.
There are many different types of policies: permanent life insurance, term life insurance, universal life insurance among others. Each has a different purpose, features, and benefits. And each is designed to fit the unique needs of its applicant.
Life insurance offers two primary benefits to both the policyholder and the company. First, it serves as an investment in case of death; it allows you to leave something for your loved ones. Secondly, it grows in value over time – it pays dividends if you live long enough to benefit from them; someone that dies younger may not get as much out of the policy as they would have had they lived longer and paid more in premiums.
In addition to the above two benefits, life insurance also provides the following benefits:
-in case the policyholder dies shortly after taking out the policy, the balance of life insurance can be paid to whomever you like.
-assistance and relief from debts. When a person’s spouse dies, debt and mortgage payments are usually taken over by their estate. With life insurance, these payments are paid to the beneficiaries instead.
-assistance with funeral services. Life insurance provides a decent amount of funds to support funeral services in case of death, usually enough to cover the cost of burials and last wishes.
-insurance against unexpected family emergencies (such as illness, hospitalization, etc.). The money can be used for expensive medical treatments or even travel expenses for the sick or elderly relatives who live far away. For example, if one member of a family has cancer and requires radiation treatments that are not covered by health insurance (they’re too expensive), this type of policy would cover that expense.
-money for college tuition – some policies can pay for the entire cost of a child’s tuition in school or university.
-protection from future tax liabilities. For example, some policies provide that part of the death benefit is added to a tax-free Individual Retirement Account (IRA) account, which allows the policyholder to save money for his/her retirement.
-low administration fees over the policy’s lifetime. This benefit is provided by term life insurance policies.
-life insurance replaces the need for a will or trust. If a person does not have life insurance and passes away without a will, his/her estate may be subject to probate court proceedings and the costs of settling their estate
-protects an individual’s investment assets in case of divorce or other family dispute. For example, if one spouse dies, the other is left with nothing but some debts they could not afford to pay and assets they may not even want to keep – all these would have gone to anyone else if the second spouse had life insurance on the first one.
-no taxes are due upon death. With the death benefit paid to heirs, there is no capital gain, which is a tax on investment profits.
-protects a person’s estate and provides financial security for his/her estate in case of a future disability or illness. For example, if a policyholder who has little income dies after an injury, the policy pays out all or part of the death benefit to his/her spouse and children (as long as they are not in debt) until the spouse reaches a certain age when it stops as he/she needs relatively little money to live on. In this case, you would be financially secure for all of your life; you would have none of these debts eliminated when you die.
-helps in the management of funds for people with disabilities. For example, if you or your parents have been diagnosed with a disability, life insurance will provide payment for all or part of the expenses you may incur during your lifetime and that you cannot cover.
-a portion of the death benefit can be designated to an individual, instead of going to a trust or an estate; this is called a “split-dollar” policy. For example, a policy could allow you to designate that half of the death benefit goes to someone else (such as your spouse or child), and that half can be paid out at any time you wish while living.
Life insurance is not a free product. It is a form of investment and you will have to pay for it by buying it from an insurance company, banking institution, or agent. The price is based on the amount of money you want to set aside in the policy and how long you would like to keep it. Life insurance policies are offered by many companies such as banks, brokers, insurers, agents and independent agents. Premiums and benefits vary depending on what type of life insurance you choose to buy and how much time your policy will provide coverage.
The amount of life insurance coverage you need depends on a number of factors. Life insurance coverage is available in three general types: term, permanent and universal/whole life. The amount of coverage an individual may require will usually depend upon the age at which he or she would like to collect the benefits and what income level he or she needs to maintain his or her lifestyle.
There are two basic types of life insurance policies: whole life and term insurance. Whole life insurance plans create a cash value that grows as long as the policyholder lives; this is ideal if you want your policy to pay out money over time while you’re still alive. Term insurance has a limited payment schedule; it may automatically renew or provide payment only in certain increments.
Term life insurance is typically sold in amounts ranging from $1,000 to $100,000. If you choose to purchase whole or universal life insurance, you can select policy amounts between $50,000 and $3 million. A network of independent agents can help you find the right coverage at the best price.
The key factor when selecting an insurance company is how they offer their policies to the public. The more you know about them, the more likely you will be able to determine which policy is right for your needs and budget.