What is life insurance?
Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees the payment of a death benefit to the beneficiaries designated on the death of the insured. The insurance company promises a death benefit in return for the premium payment by the insured. This is often calculated with a free asset ratio.
Understanding life insurance
The purpose of life insurance is to provide financial protection to dependents who survive after the death of an insured person. It is essential that applicants analyze their financial situation and determine the standard of living necessary for their surviving dependents before purchasing a life insurance policy. Life insurance agents or brokers play a key role in assessing needs and determining the most appropriate type of life insurance to meet those needs. Several life insurance channels are available, including whole life, term life, universal life and variable universal life (ULV) policies. It is prudent to reassess life insurance needs each year, or after major life events such as marriage, divorce, the birth or adoption of a child, and major purchases, such as a home.
How Life Insurance Works
There are three main components of a life insurance policy.
The death benefit is the amount of money that the insurance company guarantees to the beneficiaries identified in the policy on the death of the insured. The insured person will choose the desired death benefit amount based on the estimated future needs of the surviving heirs. The insurance company will determine whether there is insurable interest and whether the insured is eligible for coverage based on the company’s underwriting requirements.
Premium payments are set using actuarial statistics. The insurer will determine the cost of insurance (COI) or the amount required to cover mortality, administrative and other police maintenance costs. Other factors that influence the premium are the age of the insured, his medical history, occupational risks and the propensity for personal risk. The insurer will remain obliged to pay the death benefit if the premiums are subject to need. With term policies, the premium amount includes the cost of insurance (COI). For permanent or universal policies, the amount of the premium consists of the COI and an amount in cash.
- The cash value of permanent or universal life insurance is a component that serves two purposes. It is a savings account, which can be used by the policyholder, during the life of the insured, with cash accumulated with tax deferral. Some policies may have restrictions on withdrawals depending on the use of the money withdrawn. The second goal of cash value is to offset rising costs or to provide insurance as the insured ages.
Life insurance riders
Many insurance companies offer policyholders the ability to customize their policies to suit their personal needs. Endorsements are the most common way for a policyholder to change their plan. There are many runners, but availability depends on the supplier.
- The accidental death endorsement provides additional life insurance coverage in the event of the insured’s accidental death.
- The waiver of the premium endorsement guarantees that premiums will be waived if the policyholder becomes disabled and unable to work.
- The disability rider pays monthly income in the event that the policyholder becomes disabled.
- At the time of diagnosis of terminal illness, the addendum to the accelerated death benefit (ADB) allows the insured to receive part or all of the death benefit.
Each policy is unique to the insured and the insurer. The revision of the policy document is necessary to understand the coverage in force and if additional coverage is required.