If you have dependents who require your financial support, you should buy life insurance. If anything untoward happens to you, your policy will offer your dependents a payout that can help them carry on with their lives. If purchasing life insurance is something you’ve considered, here’s what you need to know about how these policies work.
How Does Life Insurance Work?
To understand how life insurance works, it’s important to first familiarize yourself with a few common terms used by insurance companies.
- Policy: The policy refers to the contract or agreement between you and the insurer.
- Premiums: This is what you pay on a monthly or yearly basis to the insurance company to continue being covered.
- Policyholder: The policyholder is the individual for whom the policy is bought.
- Beneficiary: When you purchase a life insurance policy, you will need to name a beneficiary. This is the person who will receive the death benefit if you pass away. You can name your parents, spouse, children, other relatives, or charities as the beneficiary.
- Death benefit: This is the payout that is given to your beneficiary by the insurance company.
So, essentially, life insurance is a contract between the policyholder and insurance company. In exchange for the premiums paid by the policyholder, the insurance company offers life insurance coverage. If the policyholder passes away while the policy is in force, the insurance provider pays a lump sum to the beneficiary.
Types of Life Insurance
The two main types of life insurance policies you need to know about are term life insurance and permanent life insurance. Term insurance offers you coverage for a specific number of years and is more affordable compared to permanent life insurance.
Permanent life insurance policies last a lot longer, typically throughout the policyholder’s lifetime unless the policy is canceled. These policies, in addition to offering life insurance coverage, also serve as an investment tool.
Do You Need Life Insurance?
Most people will require some type of life insurance. If you have dependents or debts, you should ensure that you purchase a policy with adequate coverage. That said, even if you don’t have any financial commitments currently, it’s a good idea to purchase at least a small term insurance policy.
