What is life insurance?
Life insurance is a type of an insurance which covers life. Whereby an insurer guarantees payment to designated beneficiaries once a policyholder (insured) dies.
Beneficiaries are policyholder's relatives or family members who are mentioned into a policy to receive death benefits. These beneficiaries are added into a policy by a policyholder himself/herself.
An insurer is liable to pay beneficiaries who are mentioned in the insurance contract the specified amount of benefits once a policyholder pass away. But also, a policyholder is required to pay premiums regularly as stated in the contract to make the policy active.
Types of life insurance
Generally, there are two main types of life insurance which are;
1. Term life insurance and
2. Permanent life insurance.
1. Term life insurance
Term life insurance is a type of life insurance that doesn't cover entire life. It expires after a certain period of time. Once a term expire a policyholder can renew it, but at higher price because of the increase of the policyholder's age. Unlike permanent life insurance, term life insurance doesn't build cash value. Cash value is an amount generated along side your life insurance policy that allows you to access it while you are still alive.
Types of term life insurance
i. Level term life insurance
Level term life insurance is a type of term life insurance in which premiums and death benefits are fixed. They do not change throughout a term.
ii. Annual renewable term life insurance
Annual renewable allows a policyholder to renew the policy without re-qualification process. However, premiums tend to increase each year as the age of an insured increases, while the death benefit (sum assured) remains the same.
iii. Decreasing term life insurance
It is a type of term life insurance by which death benefits decrease periodically, usually after each year. However, in
decreasing term premiums are usually fixed. This type of life insurance is mostly used to cover loans.
iv. Increasing term life insurance
Increasing term is a type of term life insurance by which
death benefit increases as insured's age increases. It is designed to protect death benefit from inflations.
v. Convertible term life insurance policy
Convertible term is a type of term life insurance which can be converted to permanent life insurance without undergoing medical examination.
vi. Return of premium term life insurance
This is a type of term life insurance by which
premiums are returned when an insured outlives the policy.
vii. Group term life insurance
Group term life insurance is a type of term life insurance policy that covers a group. It is mostly issued by companies or organizations for their employees. Most of organizations provide it at no cost as a part of benefits.
2. Permanent life insurance
It is a type of life insurance which provide coverage for the entire life of an
insured. Most of permanent life insurance policies build
cash values. The cash value refer as to an amount of money you receive if you decide to surrender the policy before your death or before policy maturity, you can also withdraw or borrow against or use it to pay your premiums. But you should know that, accessing your cash value can affect your future death benefit.
Permanent life insurance is more expensive than term life insurance, this because;
- Permanent life insurance provides coverage for the entire life of an insured.
- Permanent life insurance builds cash values (saving components).
Types of permanent life insurance
i. Whole life insurance
This is a type of permanent life insurance by which premiums and death benefits are fixed (do not change over time).
ii. Universal life insurance
This is the type of permanent life insurance which is more flexible as you can adjust premiums and death benefits. Though you might be required to undergo medical examination when you want to make adjustment.
In universal life insurance, cash value is guaranteed but is not fixed. The growth of cash value interest rate can rise or fall depending on the market condition but cannot fall pass the minimum rate (guaranteed rate).
iii. Indexed universal life insurance
It is the type of permanent life insurance which allows adjustment of both premiums and death benefits. It is similar to universal life insurance except on the way cash value is built. In Indexed universal life, the cash value interest growth rate based on stock market index selected by the insurance company, such those index are S&P 500 and Nasdaq composite.
The cash value growth rate is not fixed, it can rise and fall depend on the index performance.
Importance of life insurance
1. It provides financial protection by guaranteeing death benefits to the family (beneficiaries) once a breadwinner die. The benefits received by the family members may help them to pay off debts, school fees and other living expenses.
2. It gives peace of mind to the family as they are sure that they will be financially good once a breadwinner die.
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