Life insurance gives peace of mind to you and your family. Here’s what you need to know to choose the right policy for your needs.
The person who pays for the policy is called the policy owner, and the person covered by the policy is the insured. The beneficiary can be a single person or people and entities (such as children). The death benefit is typically paid when the insured dies.
Definition
A life insurance policy (also known as life assurance in some countries) is a contract between the insurer and the insured in which the insurer promises to pay a sum of money to the beneficiaries upon the insured person’s death. This payment is called the death benefit and may include other benefits, such as terminal illness or critical care coverage, depending on the type of life insurance purchased.
The policyholder is responsible for paying the premiums for the life insurance and is almost always the insured. However, it is possible to buy a life insurance policy for another person with that person’s consent. This is typically done for children, seniors, spouses, and other family members. The beneficiary is the person or persons to receive the death benefit from the policy, and they can be an individual, organization, or trust.
In recent years, some life insurance companies have developed products that target niche markets and cater to the needs of older adults. These are often called final expense insurance or burial policies and have lower face values than traditional whole-life or term policies. In addition, they may only require a simple health exam and answers to a few questions. These life insurance plans can sometimes be tax-deductible up to Rs 1.5 lakh per annum under Section 80C$ of the Income Tax Act, 1961.
Coverage
Life insurance provides money to your beneficiaries after you die to help pay for your funeral costs, living expenses, bills, and education. Some policies also offer benefits to the policyholder while they’re alive through cash values and accelerated death benefits.
The amount paid to your beneficiaries under your life insurance policy is called the face value or coverage amount. Your face value is typically based on your age and the type of life insurance you choose.
Whether you choose a term or permanent policy, the amount of money paid out under your policy is guaranteed to remain level for the duration of your plan, so long as your premiums are paid on time. Some permanent policies also build cash value over time that you can access by taking out a loan or using it as collateral.
During the two-year contestable period, your insurer can review your application and the information about your health it contains before paying your death benefit. It can deny payment to your beneficiary if it finds that you gave false or incomplete information on your life insurance application. After the contestable period ends, your beneficiaries receive your death benefit minus any premiums you still owe. You can change your beneficiaries anytime by contacting the life insurance company and submitting new documentation.
Premiums
The premium is the payment made to maintain a life insurance policy. It may be paid monthly, quarterly, or annually. It is essential to pay your premiums on time. If you do not, your life insurance policy will lapse. This will cause your beneficiaries to receive no death benefit. A grace period is usually in place before your life insurance policy lapses.
Your premium is based on how much risk the life insurance company assumes in covering you in the event of your death. A significant factor in determining your life insurance premium is the health and age of the insured person. Other factors include family history, occupation, and hobbies. For example, if your family has a history of certain medical conditions or high-risk sports, your life insurance premium will be higher.
Premiums are also used to cover liabilities and business expenses for the life insurance company. The remainder of your premium becomes the insurer’s profit. Independent rating agencies often rate life insurance companies to see how well they perform long-term.
Customizing a life insurance policy with various riders is possible to enhance your coverage in case of an unlucky incident. These rider options can increase your coverage amount, decrease your death benefit or add on accidental death and dismemberment benefits.
Benefits
Depending on the policy type, life insurance policies can provide both death and living benefits. A death benefit will pay a sum of money to your beneficiaries after your death. In contrast, a living benefit can help you during your lifetime by paying for certain expenses like home care or funeral costs.
While death and other risks are the main factors determining a person’s premium, the underwriting process also considers health and lifestyle information such as age, height, weight, occupation, driving record, family history, and smoking status to assess your risk. Individuals with poorer health may have higher premiums. The underwriting process also accounts for the cost of insurance based on mortality rates and other financial considerations, including administrative and sales expenses.
A permanent life insurance policy is designed to keep you insured for the rest of your life and usually accumulates a cash value. The cash value is similar to a savings or investment account, earning interest on a tax-deferred basis. You can use this cash value to reduce or borrow against your future premium payments.
When choosing a life insurance policy, you should regularly assess your coverage needs based on your financial obligations and goals. You should also consider the number of beneficiaries you wish to include in your life insurance policy. If you fail to pay your premium, the policy will lapse, and your beneficiaries won’t receive a death benefit. You can reinstate a lapsed policy within a specified period, often after paying the overdue premium with interest.
