What is Life Insurance
From Financial Literacy Wiki
What is Life Insurance?
Life insurance is a contract between you, the policyholder and the life insurance company, the insurer. In this contract, you agree to pay the insurer a sum of money called the premium in return for insurance coverage. The insurer undertakes to pay you or your beneficiary a sum of benefits known as the policy benefits in the event of your death, permanent and total handicapped, critical illness or any other events as stipulated in the contract.
Life insurance should be used as a primary financial vehicle to protect your dependents from financial losses in cases of the events mentioned above. By purchasing a life insurance, you transfer the risk of financial losses to the insurer. To secure this financial protection, you pay the insurer the premium. For life insurance policies, there are two types of premium payment, single premium where the entire premium is paid upfront; regular premium where policyholders have to make a monthly or annual premium to the insurer.
Benefits
As mentioned, buying life insurance is an excellent way to protect your family against financial losses resulting from unfortunate events that happen to you. By paying a small sum of money, you manage to transfer such risk to the life insurance company.
Why is there a need to protect your family financial losses? Well, buying insurance can in the following ways solve any financial problems resulting from unfortunate events.
- Pay off family's outstanding loans especially housing loans since the loan period is long and the principal owed is huge.
- Replace lost income if the insured is dead or suffer from permanent disability.
- Pay for the exorbitant medical bills in cases of critical illnesses like cancer or heart disease.
- Provide for children's tertiary education.
- Build retirement funds.
