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Life Insurance Policy – Why do you need it and how does it work?

Life Insurance Policy – Why do you need it and how does it work?
Life Insurance Policy – Why do you need it and how does it work?


06 September, 2021

Life Insurance Policy – Why do you need it and how does it work?

Reading Time: 2 minutes

Life is beautiful, but also uncertain, and having a plan for the future is a must. 

What is life insurance?

Life Insurance is a contract between the policyholder and the insurance company, where the company pays a specific sum to the insured individual’s family upon his demise. The life insurance sum is paid in exchange for a specific amount of premium.

Why should you get one?

Whatever you do in life, however hard you work, you can never be sure about life and its uncertainties. It is, therefore, important that you do not leave anything to chance, especially “life insurance.” As demise is the only certain thing in life, it will ensure that your loved ones are protected even after you. Having a sense of security for your family can save you from unnecessary stress. 

When do you pay?

Life insurance premium can either be a regular monthly/annual payment or a one-time payment. The pay-out (called a death benefit) is the amount of money the life insurance company would pay your beneficiaries if you passed away unexpectedly during the term period.

How does it work?

  1. Life insurance is a legal contract.
  2. For the contract to be binding, the life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities.
  3. For a life insurance policy to remain in force, the policyholder must pay a single premium upfront or pay regular premiums over time.
  4. When the insured dies, the policy’s named beneficiaries will receive the policy’s face value or benefit.
  5. Term life insurance policies expire after a certain number of years whereas, permanent life insurance policies remain active until the insured passes away, stops paying premiums, or surrenders the policy.
  6. A life insurance policy is only as good as the financial strength of the company that issues it. 
  7. The benefit of a life insurance policy is usually tax-free.

How do you select a policy based on death benefit?

Before you apply for life insurance, you should analyze your financial situation and determine how much money would be required to maintain your inheritor’s standard of living or meet the need for which you’re purchasing a policy. 

For example, if you are the primary caretaker and have very young children, you would want enough insurance to cover your custodial responsibilities until your children are grown up and able to support themselves. You might research the cost to hire a nanny and a housekeeper or to use commercial childcare and cleaning service, then add some money for education. Add up these costs for over the next 16 or so years, add more for inflation, and that is the death benefit you might want to buy.

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