Life insurance appeared, around the year 1400, as an incidental circumstance when marine insurance policies covered embarked travelers or slaves.
A life insurance policy is a very important part of anyone's financial decisions. Life insurance provides financial benefits to a designated person upon the death of the insured. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.
Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses.
Life insurance provides financial protection to beneficiaries, usually to spouses and dependent children upon the death of the insured.
The life insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims.
There are two types of life insurance policies, Term Life Insurance and Whole Life Insurance.
Term life insurance is a “no frills” type of life insurance. It is a life insurance for a specified time duration limit. You purchase the term life insurance policy for a specified amount of time; and once the policy expires, you are no longer covered. Usually term life insurance covers a specific term such as term of 1year, term of 20 years or term of 30 years.
Term life insurance is the least expensive insurance policy available which allows you to spend a lot less and use the extra money in a better investment. It does not build up cash value and the premium normally increases as the policy owner gets older when applying for a policy.
If you die while the policy is active, term life insurance provides the stated benefit for it; and your beneficiaries will be paid the agreed upon amount. However, the policy does not provide any returns beyond the stated benefit and once the policy expires, the insurance coverage ceases and the insurance company keeps the money.
Some term life insurance policies give you the option to renew your policy at the same rate for extended years, while others do not. The former are generally a bit more expensive.
Term life insurance is most suitable for you, if you are:
Whole life insurance, also known as “cash-value” insurance, is a basic and consistent type of permanent life insurance. This type of life insurance will remain in effect your entire life at your level premium. This type of life insurance is a good choice if you do not expect your life insurance requirements to diminish over time.
A portion of your life insurance premium goes into a reserve fund called ‘cash value’ that builds up over the entire time your policy is in effect. Your reserve fund is tax-deferred and you can borrow against it, until you withdraw it.
The whole life insurance premiums will generally remain constant over the life of the policy and must be paid periodically according to the amount indicated in the policy. You may also have the option of a single premium; which means to pay all of the premiums at once with a single lump sum. Your cash values will grow to equal the amount of the death benefit when you turn to age 100.
Whole life insurance can be very expensive. If you are on a limited budget, you may not be able to afford all the insurance coverage you actually need to protect your family. The plus point is that the death benefit is guaranteed as long as premiums are paid in full each period. The death benefits will also never decrease if you don't borrow against it.
Whole life insurance policy's returns will fluctuate with the markets and will usually follow returns available from other investments like equity mutual funds. If you decide for some reason to quit your policy, your cash value can be paid in cash or paid-up insurance.
Whole life insurance is most suitable for you, if you want to: