The Basics of Life Insurance

Aside from making yourself familiar with the terms, you must also know the basic facts about life insurance before buying one.



What is a Life Insurance

Life insurance is a legal contract between you and your insurer. The agreement says you – the insurance policy holder or insured will pay a premium over a specific time period to the insurer while the insurer will pay your beneficiaries – commonly your spouse and children an amount of money upon your death. Depending on the plan, your insurer may also start paying you or your beneficiary when a terminal illness hits you.

Benefits of Life Insurance

Life insurance gives you peace of mind. It secures your family from financial hardships once you die as it provides the funds your beneficiaries will need to settle your financial obligations and replace your income.

A good life insurance covers not only your funeral expenses but also the family’s upcoming expenses such as education, mortgage, child care, taxes and outstanding debts. With life insurance, you are at peace that your surviving family can comply with such obligations.

Life insurance also lightens your family’s pain once you are gone because they will only have to endure the emotional trauma. Without life insurance, they will not only have to endure the grief but also the financial hardships. This may lead to change in priorities, lifestyle adjustments, family reorganization and/or more stress.

Other benefits of life insurance include:

You may use it as loan collateral.

You may donate to a charity by choosing it as your beneficiary.

You may use it to secure your business. If your business is the beneficiary, it would receive money from the insurer to pay its debts or to use it as an investment.

Types of Life Insurance Policies

Life insurance policies may belong to one of the two categories – Permanent or Term Life insurance.

Permanent Life insurance covers your entire lifetime. It has no expiration and renewal dates. As long as you pay for it, you are sure that your family is protected and will receive the death benefit once you die.

Also, the beneficiaries can use the benefits for different purposes like business protection, loan collateral or investment. It also has cash values that accumulate over time. However, this type requires you to have more stable cash flow as it is more expensive and you have to pay for it for the entire lifetime.

On the other hand, Term Life insurance covers you for only a specific time period. It may last from 5 to 30 years. It is cheaper than permanent life insurance but has more downsides. The beneficiaries cannot receive the death benefit once the term ends and the insurer is still alive. Also, it does not have cash values.

Term Life insurance suits you if you have temporary needs that you can settle for a short period of time like mortgage and tuition. It is also good for you if have limited cash flow as it only requires you to pay for a certain time period and at a lower rate.