The Basics of Life Insurance

by Kay Lynn

It is important to make sure that your family is provided for in the event of an emergency. It can become very expensive to take care of all the costs associated with a funeral. That is why life insurance is such an essential part of prudent financial planning. Life insurance can help to provide financial stability during those difficult times.

Life insurance is best described as a contract between an insurance company and the contract purchaser. Life insurance provides coverage for the insured person in the event of death. The insured person designates a beneficiary that will receive a benefit in case of the death of the insured person. The death benefit depends upon the policy coverage amount and is typically paid out in a lump sum to all beneficiaries.

Policyholders purchase these insurance contracts by making premium payments. Payments must be made as stipulated in the contract for the policy to remain valid. Premium payments are typically made on either a monthly, semi-annual, or annual basis. Insurance contracts vary in cost depending upon the amount of the policy and the type of policy that is purchased.

Term life insurance policies are one of the cheapest policies on the market as they provide basic insurance benefits to policyholders. Term life cover insurance provides coverage for the policyholder over a short term basis. Term insurance cannot be redeemed for a cash value. These policies can either be renewed once the term is up or you can let them lapse. As long as the policy is still in effect when the policyholder dies, the death benefit is paid out. These policies are appropriate for a large segment of the population.

Permanent life insurance policies are a little more expensive but they offer a few more benefits as well. These policies have cash values attached to them which allow policyholders to sell them for cash. Permanent life insurance policies can also be borrowed against for cash if a policyholder chooses to do so. These accounts can also contain an investment component that will allow the policy to appreciate. The most common types of permanent life insurance are universal insurance and whole life insurance.

Ask an insurance agent to help you determine which type of life insurance fits your needs the best.

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{ 2 comments… read them below or add one }

Alex | Perfecting Dad August 2, 2011 at 8:51 am

Hi Kay! Nice article, thanks for this. I view life insurance as risk sharing, rather than a contract, although there is certainly a contract involved. The purpose of life insurance is to help pay for catastrophic losses.

For example, considering people with mortgages: They have to pay for 20 years to own their home. Most people survive the twenty years but some die and their unfortunate family might lose the home for want of making the mortgage payments. So insurance is like an pact amongst all those mortgage holders. If some of them should die in a year, then the rest will help pay the mortgage. That’s what the premiums are, this grouping to help out the unlucky people that year. Insurance companies fill need of assembling these groups of people (eg, you don’t want to be mixed in with smokers if you don’t smoke because smokers are way more likely to die than non-smokers)

Fundamentally, insurance isn’t an investment. The mixing in of investment features is insurance companies trying to make money. Insurance isn’t a scam either as some people think. It is critically important. Insurance is just a bunch of people sharing risk.

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The Wealthy Canadian August 6, 2011 at 10:29 am

My wife and I recently purchased two life insurance policies.

We purchased them now because we know that the longer we wait, the higher our premiums will be over time. We were able to lock into a fixed premium until the age of 100.

I had not realized it, but life insurance policies can often be used as security if you are applying for a loan. I’m not sure if this would necessarily be a great idea, but depending on one’s situation, it could be useful.

Nice post.

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