The most critical asset to humans is their very existence. As important as life is, ultimately, it must eventually come to an end. The social nature of humans means that in the circumstance of the death of a family member, certain benefits that are driven through that member abruptly come to an end.
In many cases, this adversely affects the livelihood of other living family members. Life insurance helps to provide some financial security to family members in the circumstance of the death of a family member, especially if they happen to be the primary breadwinner. Also, it can serve as a form of investment for an individual that decides to purchase such a policy.
It is an agreement between an individual (assurer) and an insurance company (insurer) that provides financial protection to a third-party beneficiary or beneficiaries after the demise of the assurer. Payment is guaranteed to beneficiaries as long as the assurer continues to pay the agreed premium when due. In certain instances of critical or terminal sickness, payment may be made if the two parties initially agreed to do so. Additionally, life insurance can be purchased as an investment, which may be accessed later in life.
Payment of premium could be monthly, yearly, or as agreed initially. Life insurance contains clauses that define the provisions and limitations of the agreement. These provisions and limitations are essential to protect both the insurer and the assurer. Such limitations that protect the insurer include war, fraud, suicide, and civil unrest.
Unlike before, life insurance policies are numerous and confusing to the average individual as insurance companies try to provide flexible and customized policies that provide a buffet of choices to their clients. Therefore, for an individual to decide on the best type of policy to purchase, they must understand the contents and differences between the variety of options. The different kinds of life insurance coverage and their features are presented below.
This type of policy pays out an agreed sum of money periodically until the assurer of the policy is deceased. Assurers that purchase this type of policy do so to ensure income throughout their lives. In other words, it serves as a retirement fund for the assurer. In other cases, they do it to ensure income for other beneficiaries such as a spouse or a family member. Payment of premiums can be a one-off payment or periodically depending on the capability of the assurer and the nature of the agreement made.
The assurer, in most cases, purchases the annuity life insurance policy in instances where they would outlive their income or savings. By purchasing the policy, the assurer passes on their earnings to the insurance company who, in turn, payout the assurer or a third-party beneficiary as agreed. When the assurer is deceased, payment stops or gets transferred to another beneficiary. Individuals with substantial lottery earnings are advised to purchase this type of insurance policy.
The terms of the agreement made between the insurer and the assurer determine the frequency of payment. Therefore, payment may be monthly, quarterly, bi-annually, or annually. The payment schedule usually depends on the requirements of the assurer. However, the assurer must know that inflation can significantly affect the value of their investment. It is also worth knowing that there are different forms of annuity policies to choose from, depending on the assurer’s needs. These are explained below.
Fixed annuity insurance – pays the assurer out at an agreed fixed percentage amount.
Joint annuity insurance – pays out spouses until their deaths. Sometimes the death of one may reduce the amount paid to the other.
Immediate annuity insurance – pays out the assurer/beneficiary immediately without any delay.
Variable annuity insurance – the payment to the assurer is determined by the return of investment of the insurer.
Guaranteed annuity insurance – it pays the assurer continuously and periodically until the assurer passes away. In the event of the demise of the assurer, the payout transfers to the beneficiary.
The whole life insurance policy is a type of life insurance that protects individuals throughout their lives. The value of the premium paid is the same, which guarantees fixed return while alive and provides benefits after death for funeral related expenses. The premium paid for the whole life insurance policy is high because of the expanded coverage that it gives.
The insurance company invests the premium paid by the assurer into high-interest earning enterprises such as banks. One advantage of this policy is that it allows the assurer to borrow money against the invested value. However, a minimum value must be met before an individual can be allowed to borrow.
Additionally, an assurer may receive dividends periodically if he/she wishes to do so. The assurer can also allow the premium to amass or use it to reduce the amount of premium paid. Some assurers may use it to purchase supplemental insurance policies. The whole life insurance is suitable for those who are just starting in their careers, as it will most likely provide financial security throughout their lives.
This type of life insurance policy suits a wide range of people and provides coverage for a specified timeframe. It is cheap and easy to comprehend. However, once it expires, an individual would require another policy, which tends to be more expensive as age increases, and the quality of health decreases.
The value of the policy an individual can purchase ranges between a few thousand to millions of dollars. The term of the policy usually does not exceed 30 years. For the term life insurance policy, the rate of payment of premium may be fixed. It is also paid either monthly or yearly. Additionally, the policy could be renewable every year but at a high premium, which is suitable for those that want to solve short-term financial problems.
The universal insurance policy is similar to the whole life insurance policy as both have death benefit payout and investment value. The universal policy offers an added advantage of offering the assurer the ability to adjust the premium rate that is due to the insurer. Nevertheless, the assurer must not pay below a minimum premium threshold. Additionally, if the investment value is sufficient enough, the assurer can use it to offset premium payments.
The assurer must keep a close eye on their investment as management fees can be quite expensive. Also, at the beginning of each fiscal year, a large portion of the premium payment may go to the insurance part of the agreement, while a smaller amount may go to the investment portion. Therefore, the universal life insurance policy tends to become more of an insurance policy than an investment as the assurer’s age increases.