Life insurance can be described as an agreement between an individual (the policyholder) and an insurance company, and the contract guarantees that in the event of the death of the insured individual, a beneficiary (a relative) of the policyholder will receive a sum of money (the death benefit).
The policyholder on the other hand pays regular premiums (monthly or annual).
In Simple Terms
- Life insurance is a financial protection to the loved ones in case of death. It makes sure that they can afford:
- Living expenses
- Debts or loans
- Children’s education
- Funeral costs
Main Types of Life Insurance
- Term Life Insurance
- Protects you during a certain time (e.g. 10, 20 or 30 years).
- In case of your death in-term – the payout goes to your beneficiaries.
- Usually cheaper.
- None on passing out of term.
- Whole Life Insurance
- Protects you over all your life.
- Comprises a savings/investment element (referred to as cash value).
- This is costlier, but it adds value in the long run.
- Universal Life Insurance
- A variable permanent insurance.
- You are able to change the premiums and death benefits.
- Cash value is increased either as a result of interest or investments.
- The reason why people buy life insurance.
- In order to secure the financial future of their family.
- To settle debts (such as mortgage).
- To replace lost income To will a bequest or to pay a tribute to the dead.
- In the case of business or key-person cover.
Coverages of Life Insurance
Death Benefit Coverage
This is the principal to any life insurance policy. In case of the death of the policy holder, the policy insured, the nominee (family or dependents) gets a lump sum amount. Assists the family to live afloat and covers their finances such as debts, loans, and day to day needs.
Accidental Death Benefit
Offers a supplementary compensation in case of death of an insured who dies in an accident. Others have it as part of some of their policies, and others provide it as an add-on rider.
Critical Illness Cover
The lump sum amount will be offered in case the insured is diagnosed to have a serious illness like cancer, heart attack, stroke or kidney failure.
Disability Benefit
Will cover financial assistance in case the policy holder is permanently or partially crippled because of an accident. In others, a policy is waived off in case of future premiums.
Income Benefit
The insurer does not give the family a lump sum on death of the insured; rather, he/she pays monthly or yearly income. Helpful when the necessary income is needed by dependents.
Terminal Illness Coverage
In the event that the insured has a terminal illness (the life expectancy is less than a set amount) the insurer advances the death benefit to cover medical or family expenses.
Return of Premium (under optional policies)
In case the insured lives to maturity of the policy, in some life insurance plans, all the premiums paid are paid in part or in full to the insured.
Child Education / Future Protection Benefit.
Makes sure that the cost of educating or marrying children is paid even in case the insured is no longer alive.