What is life insurance?

What is life insurance?

Everyone knows that there are different stages in life.

At one point an individual will have loved ones who will always depend on him for survival. An employed man works for the survival of his wife and children. A business man will work hard to expand his business so as to maximize his profits and ensure that his family lives a happy life. Life happens by chance. No one knows for how long he/she will live. In fact everyone knows that at a certain point in life he/she will die. Death is inevitable. It happens to break the bond between people and their loved ones. Many people do not have plans on how their loved ones will survive if they die. This means that their loved ones will have to struggle so much for survival. It’s important for people to have a life plan for the future of their dependents. Life insurance is the solution. A life insurance policy can be defined as a voluntary and legally binding agreement between an insured person and the insurance company where the insurance company promises to pay an assigned beneficiary a given amount of money as an exchange for the premiums paid, in case the insured person dies.

Types of Life Insurance Policies

Different insurance companies offer different life insurance policies. Below are the various types of life insurance policies.

1. Term insurance.

In this type of insurance, the insured and the insurer agree on a specific period of time to be covered. If the insured dies within that period, the insurance company will pay out the sum assured to the beneficiary. If the insured person dies at a time beyond the agreed period, the insurance company will not pay the sum assured. Some term insurance policies are renewable in case the period expires before the insured dies. Term assurance does not have an investment component in it. The amount of premiums paid for renewable term insurance policies vary with age. Young people will pay relatively lower premiums than old people. 

2. Whole life insurance policies.

This type of insurance policies includes the investment component. The insurance company will use part of the premium to pay a fixed amount of money to the beneficiary if the insured dies. Some of the premiums paid will be invested and the insured will be entitled to investment returns which will be paid within agreed time intervals. This type of insurance policy also allows the insured to borrow part of the premiums paid and return without being taxed. Whole life insurance policies can be classified into universal life policy, variable life policy and variable-universal life policy. The universal life policy combines the term insurance with the money market investment. In most cases a market rate of return is paid to the insured from the money market investment. Variable life policies and variable universal life policies are whole life policies that have investment funds that are tied to a stock market form of investment.

Life insurance is a long term benefit and therefore requires patience and determination.