Life Insurance, the why and the why not
Life insurance is insurance based on a specific payment to one or more beneficiaries upon the passing of the insured. The reasons that motivate people to take out insurance on their lives can be many and have far-reaching consequences.
First, most life insurance policies are taken out as guarantees for loans. If the borrower passes, the policy will pay, mainly to the bank, the policy’s face value to cover the loan. The balance is then remitted to the heir(s) of the policyholder.
The second reason most people take out life insurance is to cover the expenses of passing. We all know there can be considerable expenses when a person passes. To not burden their relatives, people take out insurance on their lives that will cover that eventuality. An insurance company can pay out an advance against the life insurance policy to cover these expenses if the insured did not have a separate funeral insurance policy.
The third reason people take out life insurance is to ensure that the loved ones left behind can continue their lives unabated (financially) after the breadwinner’s passing.
The fourth reason people take out life insurance is for asset and estate protection. At the time of passing, all of your debts become due. Having life insurance in place can make sure your loved ones do not have to carry the burden of this debt.
The fifth reason people take out life insurance is to guarantee the continuity of their business. The loss of a partner or a key person in a firm can be disastrous to the business. Companies take out life insurance on their key personnel or business partners to ensure that this threat is somewhat mitigated. Companies may also take out group insurances on their employees, allowing them as good corporate citizens to offer the family financial relief if one of their employees passes away.
And then, there are other types of insurances coupled with pension-type benefits, where the insured starts to get a monthly income after a certain age or period of paying. Another type of insurance that should be more popular is study insurance for children. It is life insurance coupled with a payout at the attainment of a certain age of the child that he can use towards his higher education.
One important aspect of life insurance is that most if not all life insurance policies contain clauses that no more premiums are due in the case of dismemberment or permanent disability. Still, the life insurance policy remains in force for the period stipulated in the policy. In some cases, it can be added as a rider on the policy. Besides this feature, many other riders can be added to life insurance policies, but we will not elaborate further in the context of this introductory article. The second, and also as important, is that, especially on permanent insurance policies, after reaching a certain age or after you have paid for a certain amount of time, the policy remains in force with no further payments required. This can vary from policy to policy, but it is an important consideration as well.
There are many types of life insurances, but the basis is the same of the time of passing a sum is paid out. Life insurances can be combined with a savings aspect. In this case, the policy increases in value and has a cash value as time progresses. It can be term insurance which means that it is only valid for a certain period, and it can also be decreasing term insurance which decreases, as in the case of a loan, the debt to the bank decreases.
What is essential for people to realize is that life insurance should not be viewed as some somber affair where one is making funeral plans but as part of estate planning. It is meant for the continuity of your estate and a level of life for your family and loved ones after you are not there to take care of this responsibility. Why do you go to work each day? Is it not to provide for yourself and your family? So, what happens in the event of you not being around to take care of your family? When one estimates the value of a person’s estate, the face value of any life insurance policies that this person may own is taken into consideration.
The big question is, why are there not more people walking around with life insurance policies? And as silly as it may sound, most people believe that they will not die. It is as simple as that. Putting aside a little bit every month can go a long way over time.
How is insurance premium calculated? The law of probability is the primary basis for all insurance calculations. Brilliant mathematicians called actuaries carry out very sophisticated mathematical calculations based on probability and how much money you are contributing can generate over time. Then, they add the cost of administrating the entire scheme and generate the amounts to payout after a certain period. One other important factor is what we call the collective contribution. This means that if many people put a little together and from the probability estimates, we know how much will pass in a particular year based on age and pattern. Thus, we can easily and collectively carry the burden and payout each person’s family when they pass.
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This article will continue with another installment called “Life Insurance explained”.
