Life Insurance

How Life Insurance Helps

Life insurance has been utilized for hundreds of years, but what specifically is it and how does it function? Basically, it’s a legal contract engineered to protect the financial interests of the policyholder and his or her loved ones in the event death.

A typical insurance contract will encompass three main parties: the policyholder, the insurer, and the beneficiaries. The policyholder is the one who buys the policy and pays the monthly premiums to the insurance company; the insurer is the provider of the policy that guarantees payment in should the policyholder pass away; finally, the beneficiary is the person (or persons) named by the policyholder to receive a lump-sum payout from the insurance company upon the policyholder’s demise.

There is a myriad of reasons why one purchases insurance. For many, the policy is bought to help compensate for potential lost income of a beneficiary, usually a spouse, in the aftermath of the policyholder’s death. Insurance benefits can go a long way in satisfying the financial needs of those who benefit by paying for educations, mortgages, or to even help keep a business functioning. Wealthy individuals may also buy insurance to help safeguard their assets and make sure that their estates are properly transferred to their loved ones.

The three main kinds of life insurance types are term, whole and universal life:

Term – A term life policy, as the name suggests, stays in effect for only a certain period of time, usually being offered in “terms” of 5, 10, 15, 20, 25 or 30 years. Term policies only offer a death benefit and premiums will usually not change throughout the period in which it is in effect.

Whole – This policy covers the person for his or her entire lifetime, but the monthly premiums will normally cost more. However, this plan develops a cash value over time as a policyholder pays into it.

Universal – The universal life policy has a flexible term period and is designed to preserve both wealth and tax benefits. It is somewhat similar to the whole life policy but offers more flexibility. A universal life policy gives the policyholder the option to make changes to the terms, the amount of the death benefit and the level of the premium. Given this flexibility and the possibility of the policy value accumulating over time makes this normally the costliest of these three described policies.

Prior to buying a life insurance policy, a future policyholder will be “rated” by the insurance provider to see if there are any risk factors in issuing the policy, such as health and lifestyle issues such as smoking, and a family history of medical challenges. Those determined to be greater health risks may have to pay bigger premiums for their policies.