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What is Life Insurance?

I know it’s kind of hard to understand what life insurance is and how it works. History of insurance dates back to ancient Rome.Well life insurance policy is a contract with an insurance company. Where you get lump sum of money known as a death benefit, to beneficiaries upon the insured’s death in exchange for premium payments. Depending on the contract some critical illness can trigger the payments.

There are variety of life insurance. Some of the major life insurance are:

  • Term insurance
  • Group life insurance
  • Permanent life insurance
  • Whole life
  • Universal life coverage
  • Endowments
  • Accidental death
  • Senior and pre-need products

How cost is determined

Insurers use rate classes, or risk-related categories, to determine your premium payments; these categories don’t, however, affect the length or amount of coverage.

Your rate class is determined by a number of factors, including overall health, family medical history and your lifestyle. Tobacco use, for example, would increase risk and, therefore cause your premium payment to be higher than that of someone who doesn’t use tobacco.  Also they will ask if you are planning for some risk entertainment like skydiving.

Why do people get it?

There are a few reasons to buy life insurance:

Protecting your family. Your family depends on you. In the event of your death, your family and dependents will need a financial cushion to get back on their feet. If you have children, you might want to cover their child care and education costs until they are adults. If you have a mortgage or other debt, you want to make sure your family is not burdened by it after you are gone.

Protecting your business. Business owners who want to ensure that their business keeps running are prime candidates for life insurance. Life insurance can help your partners, employees and heirs. Business owners also might want to consider life insurance policies for key employees.

Protecting your heirs. For high net-worth individuals with large estates that will be subject to estate tax, life insurance can help heirs pay their taxes rather than selling off assets.

What is the difference between whole life insurance or term life insurance?

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Term life policies, which are best for most people, insure you for a specific time period, such as 10 to 20 years. If you die within the term, and assuming your premiums are paid up, your beneficiaries get the payout amount.

Whole life policies, a type of permanent life, cover you as long as you live, so they tend to be far more expensive for a comparable payout or benefit amount.

Whole life policies also have an investment component built in, known as “cash value”.

For the average consumer, term life is the right choice.


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