Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients risks to make payments more affordable for the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.
Insurance Policy Components
When choosing a policy, it is important to understand how insurance works. Two of the most important components of all insurance policies are the premium and the deductible. A firm understanding of these two concepts goes a long way to helping you choose the policy that is best for you. A policys premium is simply its price, typically expressed as a monthly cost. The premium is determined by the insurance company based on your, or your business, risk profile. For example, if you own several expensive automobiles and have a history of reckless driving, you pay more for an auto policy than someone with a single mid-range sedan and a perfect record. However, different insurers may charge different premiums for similar policies, so finding the price that is right for you requires some legwork. The second important policy component is the deductible. Whenever you make a claim, you are required to meet a minimum out-of-pocket expense, or deductible, before the insurance company pays for your losses. Deductibles can apply per-policy or per-claim depending on the insurer and the type of policy. Policies with very high deductibles are typically cheaper because the high out-of-pocket cost means insureds are less likely to make small claims. When it comes to health insurance, for example, people who have chronic health issues or need regular medical attention should look for policies with lower deductibles. Though the annual premium is higher than a comparable policy with a higher deductible, cheaper access to medical care throughout the year may be worth the trade-off.
In order to answer the question, "What is life insurance?" youll first want to learn as much as you can about the various types available. At its core, a life policy is a contract between you and the insurance company to pay a benefit to the person you name as your beneficiary in the event of your passing. But there are many types of life coverage, and choosing the right one will take a bit of study and the guidance of a qualified professional. Comparing the similarities and differences of the different policy types and consulting with a broker will help arm you for the crucial decision of which type of policy to get.
Life insurance is a necessity even if you have, so far, neglected to invest in it. In fact, the average person waits for some life changing milestone before looking into it. Getting married, having a child, or even witnessing the death of a loved one are all events that typically inspire someone to purchase a life policy for themselves. Unfortunately, the different aspects of insurance are not commonly taught in school or found in a book. That means when the time comes to purchase life insurance, people may be confused about their options. This is understandable.
Lets clear up some of the uncertainty about life insurance by taking a look at the different types available. This will provide you with the basic understanding about the different life policies, helping you to make the choice about which one is right for you.
Term Life: A term life insurance policy is the type of insurance that is closest to car insurance. It has no value unless you use it, just since your car insurance has no value unless you have an accident. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death, and nothing else.
Whole Life: In most cases, whole life insurance provides lifetime death benefit coverage for a level premium. Premiums are a bit higher than term insurance when the policyholder is younger. But when you consider that term insurance premiums rise with age, the cumulative value of all premiums paid across a life time are pretty much equal between whole life and term life. Part of the whole life insurance contract states that the policyholder is entitled to a cash value reserve, and its guaranteed by the company.
Universal Life: Universal life insurance combines permanent insurance coverage with flexibility in your premium payment. A universal life insurance policy includes a cash value, so that means it also offers the potential for greater growth of cash values. The premiums you pay into the policy combined with the interest accrued increase the cash value, however the cost of insurance reduces your cash value. The surrender value of the policy is the amount payable to the policy owner after applicable surrender charges, if any.
Limited-pay: Another type of coverage is Limited-pay life insurance. With this plan, all the premiums are paid over a specified period. After that, no additional premiums are due in order to keep the policy in force. Common limited pay periods include 10-year, 20-year, and are paid out at the age of 65.
Accidental Death: This is a limited life insurance policy designed to cover the insured should they pass away due to an accident. Accidents include a wide range of injuries and incidents, but the policy does not typically cover deaths resulting from health problems or suicide. Accidental death policies very rarely pay a benefit. This is because the cause of death often is not covered by the policy, or the coverage is not maintained after the accident until death occurs. If you have this type of policy, its a good idea to be very clear about what it covers and what it excludes.
Endowments and annuities are a little more complex types of insurance that can offer investment and tax shelter features. You may want to discuss their benefits and complexities with your agent or broker.
Life insurance is less expensive to acquire during the earlier stages of life, when the risk of death is relatively low. Whether youre considering a term life policy, whole life, or something more tailored, life insurance is an essential part of your financial management plan to secure the future of your family.