What Is Life Insurance And How Does It Work?
Life insurance is a contract between you as the policyholder or insured by the insurance company as an insurer in which the insurance company will pay a nominal amount of money if there is the risk of death to the insurance policyholders.
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As an insured you must pay a premium that will be helpful to provide a replacement for the risk of your death. In other words, life insurance is a type of insurance that aims to cover people against unexpected financial losses, caused by the insured dies.
Life insurance can be purchased for its own sake and on behalf of the insured alone or purchased for the benefit of a third person.
For example, a husband may buy life insurance for his wife as the insured, or parent can also buy life insurance for his son as the insured.
Why Is Life Insurance So Important?
There are several types of life insurance, but before discussing the types of life insurance, you should know in advance some of the reasons why life insurance is so important to you.
1. As Protection Against Loss of Earnings for Family
Nobody knows what will happen tomorrow, including you.
Suppose you as a breadwinner for your family, to anticipate things that are uncertain, such as the risk of an accident, the possibility of leaving the family that still require the cost of living, you need to buy a life insurance policy so that your family can get insurance money to live after you no have an income.
2. As Protection Against Risk Due Diseases Leading Cause of Death
Based on a Medical News Today in 2015, the leading causes of death in the USA is coronary heart disease, Cancer (malignant neoplasms), Chronic lower respiratory disease, Accidents (unintentional injuries), Stroke (cerebrovascular diseases), Alzheimer’s disease, Diabetes (diabetes mellitus), Influenza and pneumonia, Kidney disease (nephritis, nephrotic syndrome, and nephrosis).
These diseases are quite common, so it is important for you to have protection against the risk of contracting these diseases and the risk of death.
3. Life Insurance Is a Way To Savings And As Preparation For Retirement
Savings in life insurance is the best alternative choice for your long-term needs because of the nature of premium payments on a regular, mandatory, and not easily retrieved at any time.
Types of Life Insurance
There are several types of life insurance products that would each have different benefits. The types of life insurance are intended to serve various needs, abilities, and the purchasing power of a diverse society. Please observe any of the following types of life insurance:
1. Term Life Insurance (Term Life Insurance)
Term life insurance function is to provide protection to the insured within a limited period only. Life insurance is usually offered a contract for 5, 10, or 20 years, with a fixed premium, and also relatively inexpensive.
It is recommended selecting this type of life insurance if you put your family’s future, especially the education of children.
This insurance is suitable for those who have a need for large insurance costs but have limited financial capabilities.
If you choose this life insurance, some benefits are:
- You as the policyholder get freedom in determining the amount of the premium according to your ability.
- Insurance money that you can get as a policyholder can achieve a high score. That is if the insured died during the contract period is still active, then the family of the insured will receive insurance money accordingly.
While the shortage of this type of life insurance is:
Insured could lose the premiums that have been paid or forfeited premium once the contract is complete if it does not suffer from health problems or death up to the completion of contract period.
2. Whole Life Insurance
Whole life insurance provides lifetime protection, although typically, insurance companies limit the protective benefits until just 100 years.
Life insurance is recommended for those who do not have dependents and want the benefits are more than just death compensation, or you are interested in the idea of long-term savings.
So, if you want the protection of life at time savings for emergency needs such as paying hospital bills, you can consider buying a life insurance policy of this type.
The advantage of this type of life insurance is:
- Policyholders possible to obtain the present value of premiums already paid.
- If you as the insured is unable to pay the premium installments regularly, you can use the cash value of the premiums already paid to pay further premiums.
- Insurance premium that was paid will be forfeited if there is no claim.
- When the contract expires, insurance money will be given in full.
Meanwhile, the shortcomings are:
- The premiums are larger than term life insurance premiums and could be more than doubled.The reason for this is the high premium because the life expectancy of Americans is only 76 years for men and 81 years for women, according to sources from the USA Life Expectancy, so the possibility of an insurance claim before the period of protection ended higher.
Life expectancy male and female USA 2016, Source LifeExpectancy
- The cash value of the total premiums already paid will not be too large as the interest for this insurance is usually only amounted to 4% per year, and this figure before tax.
3. Endowment Insurance
This type of insurance accordance with the name is the insurance which has two benefits, ie term life insurance as well as savings.
This means that you as a policyholder can obtain cash value of the insurance premium that was paid.
The cash value is sum insured if the insured dies within a specified period, in accordance with the policy of the insurance policy in question and also the insured can withdraw insurance policy within a certain time before the contract expires.
This type of life insurance is recommended for those who prefer to ensure the availability of funds for children’s education, want to have the funds for unforeseen needs in the future, and would like to have larger pension funds.
The advantage of this type of life insurance is:
- As explained above, you can claim a life insurance policy before the contract expires, for example, to fund your child’s education.However, withdrawals can only be done once in a period of several years in accordance with the agreements that have been made.
If for example, you as the insured is still alive when the time period is over, you will get the whole sum insured.
Meanwhile, shortcomings are:
- Because this type of life insurance has two advantages like combines the benefits of a term life insurance with life insurance, so premiums will be relatively high.
4. Unit Link Insurance
A unit link insurance combines the benefits of the investment, and most often offered by an insurance agent. If you are interested in investing but do not know about investing and want to continue to ensure the life you still have the benefit of protection from death, you can choose the type of this life insurance.
The advantage of this life insurance are:
- You as the policyholder not only get a guarantee of protection but also the investment returns with relatively high interest annually.
While the disadvantages are:
- Returns on investment are less significant when compared to pure investments such as stocks, money market, or mutual funds.If you are looking for a large profit from the investment, you should not rely on unit link life insurance. Insurance money that would be obtained relatively low, especially if investments fail or only produce a small profit.
Investigate Before Buying Insurance
You need to remember that before you buy a life insurance policy, you are advised to seek as much information and comparing quotes from several insurance companies, for example with regard to the protection offered and the amount of premium that you pay for, and adjust to your ability.
Consider also the number of your dependents and any funding needs that will arise in the future in choosing this type of life insurance.
The bottom line is you need to do careful planning in accordance with the needs before selecting a life insurance product you want to buy so that the benefits of protection you get from the insurance product is optimal.
Remember, be careful before buying and also apply for a life insurance product that you do not feel disadvantaged.