Life insurance is an agreement between a policyholder and the insurer, where the insurer promises to pay a selected beneficiary the benefits upon the death of the insured person, in exchange for a premium. The insured party pays the premium either as a lump sum or at regular intervals. Other factors such as terminal or critical illness may trigger payment, depending on the terms of the contract.
Benefits of Life Insurance
Life insurance provides the dual advantages of security and savings. There are seven reasons why you need to have life insurance.
1. Life insurance offers excellent risk cover against any unforeseen events. It guarantees that family and loved ones continue to experience a good quality of life after your death, since it provides a tax-free, lump sum amount that the survivors can invest in a business or money-generating project.
2. The life insurance cash value is accessible once it accumulates. Policyholders can access the money through policy loans to finance various projects or pay for any unforeseen emergencies, without affecting the policy benefits.
3. In addition to providing financial support to loved ones in the event of sudden death, it enables planning for life stage needs since it acts as a long-term investment. Certain life insurance policies offer options such as money back and guaranteed maturity values that would allow you to meet certain goals, such as building your dream home, children’s education, or planning your retirement.
4. As a long–term contract where the policyholder pays a fixed amount at set, periodic intervals, it builds a habit of thrift, which builds a decent corpus to meet unexpected financial needs.
5. Life insurance plans offer attractive tax benefits.
6. Life insurance offers less restrictions and more flexibility when it comes to accessing your accumulated cash, unlike other options such as 401k plans and IRAs.
7. Permanent life insurance provides guaranteed lifetime cover, provided you pay the premiums, no matter your personal situation or health.
Types of Life Insurance
There are two basic categories of life insurance: permanent and temporary; however, there are various subclasses, such as term, whole-life, universal, variable, and variable-universal.
A whole-life policy provides insurance cover for the lifetime of the insured party. It combines life coverage with an investment fund, and guarantees a stated, fixed amount upon the death of the policyholder. The cash value grows tax deferred each year at a set amount, until the holder surrenders the contract. Part of the premium in a whole-life policy goes towards administrative expenses; another part applies towards the insurance portion, while the balance goes towards building the cash value of the investment. The interest earned on the investment portion is tax-free until the holder withdraws it.
Universal life insurance is a permanent policy that combines an investment that pays a market-rate return and a term insurance. It differs from a whole-life policy based on the ability to adjust the premiums, level amount of protection, and the cash value during the contract term as the need arises. Universal life insurance does not guarantee a set interest rate; in reality, the insurer sets the rate periodically.
A term life insurance policy aims to protect the insured person’s beneficiaries against financial loss resulting from his or her death. This type of policy has no investment component; effectively, it pays the face value of the policy and provides protection for a limited amount of time.
The variable and variable-universal life policies are permanent insurance policies with an investment component, usually tied to bonds, stocks, or mutual fund investments.
In summary, life insurance is a strong foundation for financial security and an excellent addition to the holder’s balance sheet.
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