What is Life Insurance and Types of Life Insurance

In life, there are no certain things in this world. Mankind is exposed to many serious hazards the happening of which it is impossible to foresee or prevent, However, the effects of these hazards are highly important to provide against life and limb. One of the basic functions of insurance is to enable the insured to safeguard himself against potential misfortunes.

 

By standard definition, life insurance is a contract of indemnity between an insured and an insurer, wherein the insured undertakes to pay the premiums and the insurer promises to pay the designated beneficiary a sum of money, upon the death of the insured. Other events may however qualify as variables for the contract of life insurance to take effect, such as terminal illness or critical illness.

 

However, the premium amortizations vary depending on the age and health of the insured. In life insurance, the insured or policy holder usually pays the premium which makes the contract binding to the insurer, either on a regular terms of payment or as a lump sum. 

This is often referred to as the simplest form of life insurance. In term insurance, period is crucial because the insured has to purchase coverage for a specific price for a specified period.  If the insured dies during the period of insurance, the beneficiary is paid the proceeds of the life insurance. The only difference is that there is no investment in these type of life insurance. Also, the policy does not accumulate cash value as compared to the other types. In applying for this type of life insurance, one has to know the three key factors to be considered, which are: the face amount, premium to be paid and the length of the coverage. 

In whole life insurance, lifetime death benefit coverage is provided to the insured for a level premium in a number of cases.  The terms and conditions are relatively similar to term, but one has to purchase the policy to cover his whole life and not just a set or specific period.  Thus, premiums remain level throughout the life of the policy. Also, the insurance company invests at least a portion of the premiums paid. In whole life, premium payments are much higher than term insurance for younger ones. Nonetheless, t as term insurance premiums rise along with age at every renewal, the cumulative value of all premiums paid across a lifetime are roughly equal if policies are maintained until average life expectancy. 

 

One important stipulation is that the policyholder is entitled to a cash surrender value or cash value reserve which naturally forms part of the policy and a guaranteed obligation of the insurance company.   The good thing is that the cash value of the policy can be assessed at anytime throughout the life of the policy. At times, the policyholder may obtain policy loans and are income tax free.  These policy loans are available until the death of the insured. The procedure is that in case there are unpaid loans, the insurer or insurance company would just deduct the loan amount or unpaid portion thereof from the death benefits and releases the remainder to the beneficiary designated by the insured in the policy contract.  

 

The net amount is the amount that the insurer or insurance company must be obligated to pay to the beneficiary in case the insured dies prior to the accumulation of any amounts equals to the death benefits to be received by the beneficiary. Hence, the net amount is the difference between the cash value of the policy at the time of death and the total amount of death benefits due the beneficiary owing to the death of the insured. This characteristic makes the policy single, indivisible product, as there is no actual separation of the cash value and death benefit. 

 

The advantages of whole life insurance are guaranteed death benefits and cash values, annual premiums predictability and assurance that the mortality and expense charges will not reduce the cash value of the insurance policy contract. 

 

The disadvantages of whole life, on the other hand, are inflexibility of premiums as well as  the fact that the internal rate of return in the policy may not be competitive compared with other saving alternatives available during the lifetime of the insured. 

In universal life insurance, the insured usually decides the amount to be added over and above the minimum premium. The insurance company is given wide latitude to choose the appropriate investment vehicle, which is generally restricted to bonds and mortgages. The investment and the returns go into a cash-value account. This cash-value account is then used against premiums or allowed to build as investment capital. Therefore, in universal life insurance, both the premiums paid on the life of the insured and death benefit released to the beneficiary are flexible. 

With a variable policy, there is usually a wider selection of investment products available to the policyholder or the insured. In this type, the beneficiaries will either receive the face value of the policy or the face value plus all or part of the cash account as stipulated in the policy contract.

 

The above are the some details about the Life Insurance.