What is life insurance?
Many people think of taking out life insurance when they get married or have children. This is because, at these junctures in life, they start thinking of other people and how they may be adversely affected if they pass away. Life insurance is a financial tool by which you can ensure a sum of money is paid to those surviving you.
Life insurance policies have evolved since starting out as simple monthly premiums that resulted in a lump sum being paid out to the beneficiary upon the death of the policy holder. There is now a huge range of policies that pay out in different ways. It is important to educate yourself on the various types of life insurance policies to find the one that best suits your financial needs.
What are the different types of life insurance policies available?
Although there are different permutations of life insurance, there are generally two types of policy: whole and term. Whole life insurance is the more traditional, where a pre-agreed lump sum is paid out upon the death of the policy holder. Generally speaking, this type of policy carries higher insurance premiums, especially if taken out when the policy holder is older.
Term life insurance policies, on the other hand, have a pre-set term and only pay out in the event of death of the policy holder during the term. The policy does not accrue any value and does not pay-out once the policy term has been reached. These policies generally have terms of 5, 10, 15, 20, 25 or 30 years. Many young people take out term life insurance if they have just bought a house or started a family so that they are protected if there is a sudden death in the family.
There are also different types of contracts within these two life insurance options. Generally, they can be grouped into two categories: protection and investment. Protection policies, as the term suggested, pay out a lump sum upon death as long as insurance premiums are paid regularly during the term of the policy.
Investment contracts work more like investment vehicles, with the premiums invested in the financial markets. These types of contracts do not pay out a pre-agreed lump sum, but pay-out on an investment value basis, i.e. returns made on the premiums, which are invested by the insurance company.
Why buy life insurance?
There are many reasons why people buy life insurance. However, most new home buyers should be aware that mortgage companies or banks will require them to take out life insurance to cover the mortgage. Many people also use life insurance policies as a way of leaving money for loved ones. Spouses and children or other relatives can be named as beneficiaries of life insurance policies. It can also be seen as a way to get peace of mind and provide for family members in the event of a sudden death.