To choose insurance you need to understand how it works. Life insurance is a contract with an insurance company. The insurance company gives a lump-sum payment in the event of death of the insured person. To avail this benefit the insured person has to pay premiums regularly to the insurance company.
Life policies are actually legal contracts between an insured person and the insurer. The insured person typically pays regular premiums or sometimes lump sum amounts to the insurance company. The payment by the insurance company is triggered by events such as death or terminal illness of the insured person. The terms and conditions of the contract define the limitations of the insurance. The terms and conditions may exclude certain events so as to reduce the liability of the insurance company and may not accept claims that are related to suicide, fraud, war, riot or civil unrest.
There are two major categories of insurances – Protection polices and Investment policies. Protection policies are those which provide a benefit. This is also sometimes called as term insurance. Investment policies are those where there is growth of the capital that is invested in the policy. These are universal life or whole life policies.
Term life policies are designed for a specific period of time. This means that they provide financial protection for a specific time period such as 10 – 20 years. After that time period they continue to offer coverage but at higher premium rate. These policies are generally used to replace the lost income of person after his working years. However the benefits of this policy are generally paid lump sum and not as regular payments like paychecks.
Universal policy is also a permanent life insurance and it is designed to provide coverage for lifetime. These policies allow flexible premium rates, that is, they allow lowering or rising of the premium throughout your lifetime. Also as compared to term policies, universal policies have a slightly higher premium. Universal policy is generally used for death benefit coverage as well as building cash value.
Whole Life policies provide lifetime coverage. These policies have higher premiums and the premiums are generally fixed. These policies build cash value and are generally used for preserving wealth that you plan to transfer to beneficiaries.
Life policies are contracts defined by terms and conditions and the various types of policies are chosen based on the goals of the owner. In simple terms, policies provide your dependents with ongoing income in case of a person’s premature death.