The Basics of Life Insurance

A basic life insurance policy is an agreement made between an individual and a life insurance provider. The agreement stipulates that monthly payments will be made to the company by the individual, and in the event of the insurance holder’s death a specified sum of money will be paid from the insurance company to a predetermined beneficiary on behalf of the insurance holder.

Policy premiums are the lifeblood of insurance. So long as the life insurance policy payments are current at the time of the insurance holder’s death, the beneficiary will receive the specified sum.

There are four basic roles involved in a life insurance contract: the insurance company itself, which does the insuring; the policy holder, who is the person who has taken out and is responsible for maintaining the policy payments; the individual being insured; and the beneficiary, who the money will go to in the case of the insured individual’s death.

There are several different reasons as to why people buy life insurance. The most common reason is that an individual wants to be sure their family will be financially taken care of in the event of his or her untimely death.

Other possible reasons are: protecting a business against losing an irreplaceable employee; to help fund a retirement; to protect a mortgage or an estate; as an employment benefit; or to ensure childcare in the event that a home-maker dies.

There are three common types of life insurance, and they include:

1. Term Life Insurance

This type of insurance is maintained on a fixed schedule with predetermined fixed payments. Coverage is only provided for a certain amount of time, which is specified by the contract, for example 10 years. If the individual being insured does not die within the fixed duration set out by the contract, the policy expires and becomes void.

2. Whole Life Insurance

Whole life insurance also requires fixed payments on a fixed schedule, but instead of covering a set duration, they cover the individual up to a certain age, usually around 100 years old. In this type of insurance, a death benefit is guaranteed, so no matter at what age the insured dies, an amount will be paid. Another benefit to this type of insurance is that they can be liquidated for cash value.

3. Universal Life Insurance

Universal insurance is not fixed. Any amount can be paid at any time, up to certain maximums mandated by the government. This type of insurance also carries cash value and can be liquidated.

Common questions about life insurance usually involve the size of death benefits, length of coverage, and where to find the best insurance. Generally a recommended death benefit should be approximately 8 to 12 times the size of the insured’s annual income.

Length of coverage depends largely upon independent factors, but if the purpose of coverage is to provide for children or other dependents, then the length should be determined by how long necessary care is anticipated.

As for choosing an agent, look for independent agencies that work with at least 20 or more reputable insurance firms.