Life insurance helps protect the financial well being of loved ones upon the untimely death of a parent or income earner, as well as being essential to solid financial planning.
Essentially, life insurance is a contract between a policy owner—the insured and an insurance company—the insurer. The insured makes premium payments to the insurer to guarantee a specified amount of money or death benefit will be paid by the insurer to a beneficiary upon the death of the insured, as defined by the terms of the contract.
Types of Life Insurance:
• Term
• Whole
• Endowment
• Universal
• Variable
The head of a household or anyone whose income is dependent on for financial security should consider getting life insurance.
• Life insurance allows an insured to transfer the risk or loss of income by paying a fee or ‘premium’ to the insurer.
• The insurer, with a large capital base and expertise in risk selection and management, is better able to accept this risk than any person.
One of the main reasons people buy life insurance is to replace income that would be lost because of the death of an income earner. It helps pay household financial obligations: utility bills, school fees, food, clothing etc. Life insurance helps under the following circumstances:
• Dependent's Support: The loss of income resulting from the death of an insured could mean the surviving dependents may face financial difficulties. Life insurance can help reduce the financial burden.
• Education Costs: A parent’s untimely death may make college tuition beyond a family's reach. Life insurance can help parents insure their children’s college or university tuition.
• Burial expenses and estate planning: Life insurance may be used to pay funeral or burial expenses as well as estate taxes.
• Investment Income: Life insurance policies designed to help accumulate savings over a period of time include permanent or Whole life insurance. These can serve as an investment tool. Personal savings can grow to a substantial sum while providing the insured with life insurance coverage.
• Charity: Life insurance proceeds can be donated to a charitable organization such as a church or an educational institution.
The death of a business owner or key employee can bring about instability to a business. The following plans can help businesses continue with their operations during this difficult time:
• Business continuation insurance plan: The death of a business owner or key employee could cause significant financial implications to a business. This type of insurance can provide the necessary funds for the continued operation of the business.
• Buy-Sell Agreement: Upon the death of a business partner, a buy-sell agreement allows the living partner the ability to afford the purchase of the deceased partner's financial interest in the company.
• Life insurance as Employee Benefits: Businesses often use life insurance to provide benefits for their employees. Employers pay for all or part of these employee benefits as part of the total package from which they compensate their employees
The following are the most common life insurance policies:
Term Life Insurance: This is the most affordable type of insurance available because it provides coverage only upon the death of the insured and during a specified term, typically from 1 to 30-years. The beneficiary will receive a cash payment or ‘death benefit’ equal to the insurance amount indicated on the policy. There are three options for the death benefit amount: level term, increasing term and decreasing term. Throughout the term of the policy, the death benefit remains the same in level term, grows in increasing term, and gets smaller in decreasing term.
Whole Life Insurance: As a long-term life insurance plan, it is intended to provide coverage for the insured's entire lifetime. There is a guaranteed death benefit and includes a savings component called the ‘cash value.’ A portion of each premium payment will be set aside to create the cash value, which will be invested by the insurance company for growth. Coverage can be canceled or surrendered in total or in part to receive the cash value—may be small or even equal to zero in the early years. Premium payments are allowed to be paid from the cash value to continue insurance protection for some time. Also, Whole life allows money to be borrowed from the insurance company using the cash value as collateral.
Endowment Life Insurance: This insurance type provides a guarantee that a sum of money will also be available to the insured or the insured’s beneficiaries even if the insured lives past the term of the policy or if it ‘matures.’ The guaranteed death benefit also has a savings component called the ‘cash value.’ Endowment insurance is commonly used to cover anticipated future financial obligations such as a wedding or college tuition. Basically, it ensures a future expense will be paid. When buying an endowment policy and keeping it until maturity, it will provide a lump-sum cash payout equal to the insurance amount, or “death benefit.” As with any life insurance policy, the death benefit would be paid to the beneficiary upon the death of the insured.
Universal Life Insurance: It includes all the features of Whole life insurance and offers the insured flexibility in premium payments and face amount while providing an interest rate for added growth. Unlike whole life and term, Universal life allows the insured to make premium payments at any time and in any amount once the insured pays the initial premium, subject to certain minimums and maximums. The insured can also reduce or increase the death benefit more easily than with a traditional whole life policy.
Variable Universal Life Insurance: It has all the features of Universal life insurance coverage. However, instead of earning an interest rate, its cash value is linked to non-guaranteed equity investment funds: bonds, stocks etc. The insurance premiums will be invested into various investment options chosen by the insured who also assumes the investment risk. The amount of the policy benefit is tied to the performance of the investments.
Adding riders to life insurance policies can provide supplementary benefits. The most common include:
• Accidental Death Benefit: If the insured dies as a result of an accident, the insurer will pay a specified amount of money in addition to the basic death benefit provided by the life insurance policy.
• Waiver of Premium for Disability Benefits: The insurer waives the right to collect premiums due while the insured is totally disabled.
• Disability Income Benefits: The insurer provides a monthly income benefit to the policy owner or insured upon becoming totally disabled.
• Critical Illness Benefits: The insurer agrees to pay a portion of the policy's face amount to a policy owner or insured who suffers from one of a number of covered critical illnesses.
Interest Sensitive Whole Life (ISWL): ISWL has all the features and guarantees of whole life coverage plus provides the added possibility to participate in excess interest earned by the Company from year to year. This product should be considered when both death benefit coverage and cash value accumulation are key purchase considerations. ISWL cash values accumulate at a guaranteed minimum interest rate, plus any excess interest declared by the Company. Premium rates are guaranteed and often remain level throughout the life of the policy. Policy loans and other non-forfeiture options are also generally available to access the available cash values at any time for any reason.
Hospital Cash Benefits: The insurer provides fixed benefit payments irrespective of actual costs or any other coverage when the insured is hospitalized. Additional benefits are often payable for ICU, surgical care, out-patient care, and/or hospitalization outside country of residence.
