Life Assured: Understanding the Basics of Life Insurance
Life insurance is a financial product designed to provide financial security for individuals and their families in the event of unforeseen circumstances, typically the death of the insured person. At its core, life insurance is a contract between an individual and an insurance company. The individual pays regular premiums to the insurance company, and in return, the company pays a specified sum of money to beneficiaries upon the death of the insured person.
Let’s break down some fundamental concepts: 1. Life Assured/Insured: This refers to the person on whose life the insurance policy is taken out. The benefit of the policy is paid out when this person passes away. 2. Policyholder/Owner: This is the person who owns the policy. In many cases, the life assured and the policyholder are the same, but not always. For example, a spouse may take out a policy on their partner, making them the
policyholder, while the partner is the life assured. 3. Beneficiary: The individual or entity (like a trust or organization) designated to receive the death benefit upon the passing of the life assured. There can be multiple beneficiaries, and the policyholder can often change beneficiaries unless the designation is irrevocable. 4. Premium: This is the amount of money the policyholder pays to the insurance company for the coverage. Premiums can be paid
monthly, quarterly, semi-annually, or annually. The amount of the premium is based on several factors, including the type of policy, the age and health of the life assured, and the amount of coverage. 5. Death Benefit: This is the amount of money that will be paid to the beneficiary upon the death of the life assured. The death benefit is determined at the inception of the policy. 6. Term vs. Permanent Insurance: Term Life Insurance: Provides coverage
for a specific term, say 10, 20, or 30 years. If the life assured dies within this term, the death benefit is paid. If not, the policy simply expires unless it’s renewed. Permanent Life Insurance: Provides lifelong coverage. As long as premiums are paid, the policy remains active. This category includes Whole Life, Universal Life, and Variable Life insurance, each with its unique features and benefits. 7. Cash Value: This is a feature in many permanent life
insurance policies. Part of the premium is invested by the insurance company, and over time, it builds a cash value that the policyholder can borrow against or sometimes withdraw. 8. Riders: These are optional additions to a life insurance policy that provide additional benefits or features, often at an extra cost. Examples include an accidental death benefit rider, which would pay out an additional sum if the death was due to an accident. 9. Underwriting: The
process insurance companies use to assess the risk of insuring a person. It often involves a medical examination, a review of medical history, and sometimes, other tests or data to determine the premium rate for the policy. 10. Free Look Period: Most jurisdictions require insurance companies to offer a “free look” period, typically 10-30 days, where a new policyholder can review the policy, and if unsatisfied for any reason, can return it for a full refund of the
premium paid. Understanding these fundamental aspects of life insurance helps individuals make informed decisions when considering life insurance as a part of their financial planning. Whether to provide for loved ones, cover debts, or ensure business continuity, life insurance can offer a sense of security and peace of mind.11. Types of Riders: While we mentioned riders briefly, it’s crucial to understand the various types available: Waiver of Premium
Rider: If the policyholder becomes disabled and unable to work, this rider waives the premiums, ensuring the policy remains in force. Critical Illness Rider: Provides a lump sum payment if the insured is diagnosed with a specified critical illness, such as cancer or heart disease. Guaranteed Insurability Rider: Allows the policyholder to purchase additional insurance coverage in the future without undergoing a medical examination. 12. Dividends: Some
insurance policies, especially participating whole life policies from mutual insurance companies, might pay dividends. Dividends can often be reinvested into the policy to increase the death benefit or cash value, taken as cash, or used to pay premiums. 13. Surrendering a Policy: If a policyholder decides they no longer want or need their permanent life insurance policy, they might have the option to “surrender” it. Surrendering a policy means
terminating it before the death of the insured. When this happens, the policyholder might receive the cash surrender value, which could be less than the total premiums paid, especially if the policy is relatively new. 14. Convertibility Feature: Many term life policies come with a feature allowing the policyholder to convert the term policy to a
permanent one without a medical examination. This is useful if the insured’s health declines and they want to ensure they have lifelong coverage. 15. Life Settlements: Older adults who no longer need or want their life insurance might opt for a life settlement. This involves selling the policy to a third party for more than its cash surrender value but less than its death benefit. The third party takes over the premium payments and becomes the beneficiary upon the
insured’s death. 16. Group Life Insurance: Often offered as a part of an employee benefits package, group life insurance is a single contract covering multiple people. It typically provides term life coverage and can often be continued (though at a higher rate) if the employee leaves the job. 17. Importance of Policy Review: It’s crucial for policyholders to regularly review their life insurance policies. Life events such as marriage, birth of a child,
purchasing a home, or a change in financial situation can all necessitate changes in life insurance coverage. In conclusion, life insurance is a versatile and vital financial tool. It’s not just about the death benefit but about planning, securing the financial future of loved ones, and sometimes even leveraging it for financial gains or security during one’s lifetime. Making an informed choice requires understanding these nuances and collaborating with a trusted insurance advisor or financial planner.