What is a life insurance policy and how does it work?
Life insurance policy is a contract between a client ( called, insured) and an insurance company( called insurer). Under this contract, insured client pays a certain fee (called premium) and the insurance company makes commitment to pay a lump-sum payment (equal to the policy’s face amount*** generally speaking) known as a death benefit, to family (called beneficiaries) upon the insured person’s death.
What is the first step in getting a life Insurance policy?
The first step is meeting with a financial advisor and undergoing a process called needs analysis, which helps the financial advisor determine what the client is looking for in their policy. Here a financial advisor, sits with the client and based on the client’s current needs (Mortgage, business or personal loans etc) and future financial needs/goals(Children’s education, Retirement planning or leaving a legacy for loved ones) suggests a certain life insurance policy (e.g. $500,000, $1000,000).
What are the different forms of Life Insurance?
There are many types of life insurance. The more common types are the following:
1. Term life insurance
Term life insurance policy covers the risk or provide financial protection for a set defined in the policy. For example, 10, 20 or 30 years. The premiums stay unchanged for the selected coverage period.
Usual benefits of Term life insurance:
Received death claim amounts can be used to replace lost potential income.
It can support your beneficiaries to keep their family home, maintain their lifestyle unless children are independent etc.
2. Permanent Life insurance:
As name suggest, contrary to term insurance, Permanent life insurance provide the coverage for entire life, as long as premium is being paid.
Permanent life insurance has two types:
i. Whole Life Insurance
It is a type of permanent life insurance, which provides coverage for a lifetime.
Unlike term, this policy not only provide coverage(protection ) for life time but also gives an opportunity to build a cash value . So simply put, Whole life policy has two components – Risk coverage( like Term insurance)+ Savings( Cash value)
As one could imagine, it is a bit costly than term, since it has extra features built-in, however, it could be a great way to save for future, on tax deferred and tax free basis. Policy premium payments are typically fixed.
ii. Universal Life Insurance :
Universal life policy ( 2nd type of permanent life insurance) like Whole life policy has both components build-in( Risk coverage + Savings) however, it is designed to give client a bit more flexibility of adjusting your premium payment or coverage amounts