Why do I need life insurance?
Let’s go through a story that will inspire you and make you proactive about your children!
After meeting a minor accident on the hillside, James began to feel insecure about his kids’ future. He thought if he had met some severe accident or, God forbid, got dead because of the injuries caused by accident, who would have taken care of his children! But he remembered he had life insurance, which soothed him to a certain degree.
He then thought about his wife, who did not have life insurance. He analyzed from the perspective that what if something happens to his wife, Katie? Would he be resourceful enough to support his children all alone?
He consulted his advisor about this uncertainty he was facing. On the advice of his advisor, James (policyholder) decided to get a life insurance policy worth $200,000 for his wife (insured).
The terms and conditions of the policy were stated, and in case of Katie’s death, the children Oliver and Sophia (beneficiaries) were to get an amount of $200,000 (benefit).
Now, James has three options to explore before getting insurance for Katie.
Different types of Life Insurance
He can insure his wife for 25 years (Term Life Insurance), and in the end, his wife will be 60, and the children will be self-sufficient. And if anything happens to his wife during this period, the security of the children’s future will not be at risk.
Alternatively, he can get an insurance policy (Permanent Life Insurance) for her entire life. It means that the benefit associated with this policy is not time-bound. Their children will benefit whenever Katie leaves this temporary place for her final destination.
The additional benefit they get with this life insurance policy is that at the beginning of the 10th year, the money will start accumulating the cash value and will undergo an increase every year. Also, if the family needs some cash to meet an emergency need, they can withdraw an amount from the cash value. And if James wants to end the policy, he will get the cash value.
The third option that James can explore is getting a life insurance policy that gives the combined benefits of a permanent life insurance policy and a saving account (Universal Life Insurance). In Universal Life Insurance, their periodic premiums will partially go to an insurance account and partially to an investment account.
The gains they will earn through this investment account will be transferred to the beneficiaries at the expiry of the policy along with $200000. They can also withdraw yearly premiums earned through this investment account.
After analyzing all the three options, James decided to get term life insurance for Katie because it fell well within his budget constraints.
When they purchased the insurance, Katie was in perfect health, and she still enjoys sound health. However, her mother fell seriously ill due to breast cancer at the age of 65, and James’ advisor asked him to get additional critical illness coverage (Rider) for her wife to be on the safer side. Because of this extra coverage, James (Payer) needs to pay an additional premium.
Now James has no longer any worries about the security of his children’s financial future as they are protected against any mishap that the future may hold for James or Katie.
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Essential Definitions in Life Insurance
Below are the important terms that you encounter when you opt for a life insurance policy:
It is the person who purchases the insurance policy and can change it. They are responsible for paying premiums when they are due. They are rightfully called policyholders or owners of the policy.
It is the person who gets life coverage against potential risks.
It is the amount that the insurer has undertaken to pay the beneficiaries under the policy in case something unfortunate happens to the insured. It is also commonly known as the coverage amount or protection amount.
It is the amount that the insurer pays to the beneficiaries at the time of maturity of the policy.
The beneficiary is the person the policyholder nominates to get the insurance amount when the policy is mature. The policyholder can name more than one person as the policy’s beneficiary.
Insurance Policy or Contract
This contract states the terms and conditions of a life insurance policy after the insurance company and the policyholder reach a mutual agreement.
Premium is the amount that the policyholder pays to the insurance company periodically to continue the policy. So, the policyholder pays this premium on a monthly or quarterly basis, depending on the nature of the policy.
It is the person who pays the amount of premium. If the person liable to pay the tip fails, the insurance company will cancel the policy.
If the insured needs some extra protection or wants to limit the end benefits, they can ask for a change in the insurance policy. A rider is a provision resulting in changes to a life insurance policy.
Permanent Life Insurance
It is the type of life insurance that does not expire and does not need a renewal from your side. It also has a saving component that yields extra benefits to the beneficiaries. To continue the policy, you need to pay premiums periodically.
Term Life Insurance
This type of life insurance is limited to a specific period, and if you want life coverage beyond that period, you need to renew the policy. This policy does not have any cash value.
Universal Life Insurance
It is a permanent life insurance policy that gives you an additional benefit of investment savings, and you also need to pay low premiums under this policy. The premium you pay under this policy partially goes to the policy’s cash value and partially to the death benefit component. It offers flexibility as you can change the death benefits by adjusting the premium.
Your cash values earn interest, and you can withdraw money from it at the time of need.
Cash Value is a permanent or universal life insurance policy component that accumulates during the policy term. You earn interest on this value, and you can withdraw funds from it on rainy days. If the policyholder decides to end the policy, he gets the accrued cash value.