Understand Life Insurance Prior to Buying It
How many people actually understand what life insurance is? Life insurance is a contract, above all, that binds one party (the insurance company) to pay a sum of money upon the death of the insured of the life insurance contract, in return for premium payments by another party (the policy holder). They do not need to be the same party, the policy holder can, and often is someone other than the insured. Sometimes a spouse can take out insurance on the other spouse; the one who takes it out is the policy owner, the other is the insured. Many times corporations take out policies on given employees. The firm owns the life insurance, but the officer of the firm is the insured person.
Benefits are, needless to say given to beneficiaries. Just as any kind of contract would, insurance policies set forth the responsibilities of the parties and any exclusions, liabilities and limitations of the contract. Exclusions can apply, such as an exclusion concerning suicide.
The 3 kinds of life insurance are whole, term and universal life.
Both whole life and term life pay the death benefit, but whole life has a certain payout no matter when the insured dies, whereas term life only covers a certain term, as the name would imply. This is for people who are seeking full coverage over their entire life, not only for a certain time. This type of policy also accrues a cash balance. The guaranteed character of the death benefit makes whole life insurance pretty expensive.
For those who need to have insurance only during a certain period of their lives, there is term life insurance. The term of the insurance is spelled out in the policy and only covers the risk, it does not provide any accumulation of cash value as whole life does. Term life is usually chosen to cover a fixed period of time, for example while children are young. These insurance policies carry the lowest premiums because of the limitation of the coverage.
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For a sizeable cash accrual from a policy, universal life insurance is the one you’ll want. A universal life insurance policy accrues balances from premiums that are bigger than the cost of the policy. This cash value is paid each month with interest, and the costs of the policy are debited each month. The interest rate on the cash balance is determined by the insurer, usually pegged to some financial instrument such as bonds, or some other interest rate index.
The premium of a life insurance policy is set based on the risk factor for the insurance company. For example, a 50 year old would have higher premiums if he applied for insurance than would a 20 year old. To calculate these risks, actuaries study the average risk of death based on factors like this such as age, gender or smoking.
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