Life Insurance Explained

The truth is we are all going to die one day. No one will live forever. So it is important to know that your loved ones will continue to make a living if you die.

The primary objective of life insurance is to allow your loved ones to receive a lump sum of money, in the event of an unfortunate tragedy, that can be used to replace the loss of income, pay off the mortgage and other debts, have financial stability, pay for the cost of the funeral, etc.

If you are reading this post, it is probably because you have seen or heard the term life insurance or you are about to buy a life insurance policy and would like to know more.

By continuing to read this post, you will have a better understanding of life insurance policy.

Definition

Life insurance is an insurance policy that provides a cash payment benefit called “death benefit” to your family or designated beneficiary if you die, in return for your payment of premiums.

Types of life insurance

They are two primary types of life insurance: “Term” (also called temporary life insurance) and “Whole-life” (also known as permanent life insurance). Both types can be provided by insurance companies in several forms to meet different kinds of needs. An insurer can also include additional features, called riders, at an additional cost to cater for other future needs such as disability, income protection and critical illness.

Term

It is a type of life insurance that provides coverage for a fixed term, usually 10, 20 or 30 years. It is a temporary coverage.

The insurer will pay a cash benefit if you die during the term policy. If you don’t die after the agreed term, the policy automatically expires. And if you choose to renew the coverage, the premium can significantly increase, and the policy can become very expensive.

An insurer can also include a conversion option to allow you to change a term policy into a permanent policy.

Term life insurance premiums can be very low and remain constant during the agreed coverage period. It is an ideal type of coverage if you are young or a first-time life insurance individual looking for both affordability and death benefit. It is also recommended for an individual who knows that in the next coming years, he will have less financial obligations. For example, have paid off the mortgage, debts, college or have fewer people depending on him by the end of the term, and only need insurance for a particular period.

Whole-life

It is a permanent type of life insurance that pays a cash benefit whenever you die. Whole-life have a cash value component (the difference between the premium and the real cost of the insurance goes into a saving account and earns interests). You can receive the cash if you surrender the policy, which means your family will not receive the death cover benefit. You can also access the money at any time but will be charged penalty fees.

Whole-life policy can be expensive and have a higher premium than a term policy. Whole-life is a good type of policy for individuals who want a guaranteed life insurance coverage and those who have estate duties.

There are two main types of whole-life or permanent life insurance: “Traditional whole-life” (explained above) and “Universal life (UL)”.  UL offers more flexibility. You can change your premium and adjust the death cover benefit. This kind of policy can be helpful if there is a change in your needs. For example, you can have a higher benefit payout when your kids are small and lower your premium and benefit when your kids are grown up.

UL offers more flexibility than the traditional whole-life. You can change your premium and adjust the death cover benefit. This kind of policy can be helpful if there is a change in your needs. For example, you can have a higher benefit payout when your children are small and lower your premium and benefit when your kids are grown up.

UL insurance is ideal for people who want a permanent life cover with some degree of flexibility.

Now the question people often ask me is how to choose the right type of life insurance.

I will say it depends on many factors when it comes to selecting the right type of life insurance policy.

To give you a hint, you should ask yourself the following questions:

What are my future needs?

What amount of coverage do I need?

What do I want to cover?

What is my age, income and lifestyle?

How much premium can I afford?

By asking yourself the above questions, you can compare if the benefits provided by the life insurance policy you are about to buy meet your specific needs.

I hope this helps you. If you enjoyed this post, please share or leave a comment below. Thank you!

3 Comments
  1. Author
    Mixo 2 years ago

    It is explained very well.

  2. Kobi 2 years ago

    I like the post. I think you can also add “Variable Universal-Life (VUL).” In this case, the cash value is invested in the stock market (similar to a mutual fund).

  3. Axel Kasongo 2 years ago

    Thank you, Kobi for your inputs. It is, in fact, a type of universal life insurance. By investing in stocks and bonds, the insurance company can generate a higher return. The interests (as well as the risk) on the cash value are greater than universal life insurance and whole-life insurance.

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