How Life Insurance Works

The insurance is a contract between an insurance provider and an individual with an insurable interest. The company promises to transfer financial risk of premature insurer’s death for a particular premium amount. Three main components of the insurance are discussed below.

Death Benefit

It is the total amount of cash that the beneficiaries receive when the insurer dies. Despite the fact that the insured determines the final payout, he/she must also decide whether it will be an insurable interest or whether the insured individual can qualify for the coverage by its underwriting requirements.

Premium Payments

The insurance company, uses actuarially based statistics to come up with a figure that a person needs to pay to cover mortality expenses. Factors that affect this include personal & family medical history, age, and lifestyle which are the primary risk determinants. If the insurer pays the premiums as agreed, the company is at liberty to pay out the death benefit.

Cash Value Accounts

It only applies to people who have permanent life insurance. It comes with a cash value component that serves two purposes. One it is a saving account that enables the insured to accumulate capital which he/she can utilize as a living benefit when the insured is still living. Second, the insurer can use it to mitigate risk.

Types of Life Insurance

Although insurance providers have various plans they offer people seeking life insurance, there are two main types of insurance i.e.

1. Term- it is the simplest form of life insurance. It only pays if death occurs during the terms policy which is usually one to thirty years. The option does not have any other benefit provisions.

2. Whole Life/ Permanent- this option pays whenever a person dies even when they live for a decade. There are different variations within this option allowing a person to choose the one they feel will work best for them.

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Perks Of Life Insurance

The type of insurance comes with its set of benefits that people cannot get from other financial instruments such as:

  • #1

    It offers infusion for money that helps mourners to deal with the adverse economic consequences of the death of the insured.

  • #2

    A majority of policies are very flexible in regards to adjusting the needs of the policy holder. It is possible to decrease death benefits anytime, and one can opt to increase, skip, or reduce premiums quickly.

  • #3

    A beneficiary may opt to change the life insurance policy with another annuity or life policy without having to worry about paying for current taxation.

  • #4

    Beneficiaries enjoy favorable tax treatments unlike other financial instruments because the death benefits are income tax-free.