Life Insurance: A
Slice of History
The modern
insurance contracts that we have today such as life insurance, originated from
the practice of merchants in the 14th century. It has also been acknowledged
that different strains of security arrangements have already been in place
since time immemorial and somehow, they are akin to insurance contracts in its
embryonic form.
The phenomenal
growth of life insurance from almost nothing a hundred years ago to its present
gigantic proportion is not of the outstanding marvels of present-day business
life. Essentially, life insurance became one of the felt necessities of human
kind due to the unrelenting demand for economic security, the growing need for
social stability, and the clamor for protection against the hazards of
cruel-crippling calamities and sudden economic shocks. Insurance is no longer a
rich man's monopoly. Gone are the days when only the social elite are afforded
its protection because in this modern era, insurance contracts are riddled with
the assured hopes of many families of modest means. It is woven, as it were,
into the very nook and cranny of national economy. It touches upon the holiest
and most sacred ties in the life of man. The love of parents. The love of
wives. The love of children. And even the love of business.
Life Insurance as
Financial Protection
A life insurance
policy pays out an agreed amount generally referred to as the sum assured under
certain circumstances. The sum assured in a life insurance policy is intended
to answer for your financial needs as well as your dependents in the event of
your death or disability. Hence, life insurance offers financial coverage or
protection against these risks.
Life Insurance:
General Concepts
Insurance is a
risk-spreading device. Basically, the insurer or the insurance company pools
the premiums paid by all of its clients. Theoretically speaking, the pool of
premiums answers for the losses of each insured.
Life insurance is a
contract whereby one party insures a person against loss by the death of
another. An insurance on life is a contract by which the insurer (the insurance
company) for a stipulated sum, engages to pay a certain amount of money if
another dies within the time limited by the policy. The payment of the
insurance money hinges upon the loss of life and in its broader sense, life
insurance includes accident insurance, since life is insured under either
contract.
Therefore, the life
insurance policy contract is between the policy holder (the assured) and the
life insurance company (the insurer). In return for this protection or
coverage, the policy holder pays a premium for an agreed period of time,
dependent upon the type of policy purchased.
In the same vein,
it is important to note that life insurance is a valued policy. This means that
it is not a contract of indemnity. The interest of the person insured in hi or
another person's life is generally not susceptible of an exact pecuniary
measurement. You simply cannot put a price tag on a person's life. Thus, the
measure of indemnity is whatever is fixed in the policy. However, the interest
of a person insured becomes susceptible of exact pecuniary measurement if it is
a case involving a creditor who insures the life of a debtor. In this
particular scenario, the interest of the insured creditor is measurable because
it is based on the value of the indebtedness.
Common Life
Insurance Policies
Generally, life
insurance policies are often marketed to cater to retirement planning, savings
and investment purposes apart from the ones mentioned above. For instance, an
annuity can very well provide an income during your retirement years.
Whole life and
endowment participating policies or investment linked plans (ILPs) in life
insurance policies bundle together a savings and investment aspect along with
insurance protection. Hence, for the same amount of insurance coverage, the
premiums will cost you more than purchasing a pure insurance product like term
insurance.
The upside of these
bundled products is that they tend to build up cash over time and they are
eventually paid out once the policy matures. Thus, if your death benefit is
coupled with cash values, the latter is paid out once the insured dies. With
term insurance however, no cash value build up can be had.
The common practice
in most countries is the marketing of bundled products as savings products.
This is one unique facet of modern insurance practice whereby part of the
premiums paid by the assured is invested to build up cash values. The drawback
of this practice though is the premiums invested become subjected to investment
risks and unlike savings deposits, the guaranteed cash value may be less than
the total amount of premiums paid.
Essentially, as a
future policy holder, you need to have a thorough assessment of your needs and
goals. It is only after this step where you can carefully choose the life
insurance product that best suits your needs and goals. If your target is to
protect your family's future, ensure that the product you have chosen meets
your protection needs first.
Real World
Application
It is imperative to
make the most out of your money. Splitting your life insurance on multiple
policies can save you more money. If you die while your kids are 3 & 5, you
will need a lot more life insurance protection than if your kids are 35 &
40. Let's say your kids are 3 & 5 now and if you die, they will need at
least $2,000,000 to live, to go to college, etc. Instead of getting $2,000,000
in permanent life insurance, which will be outrageously expensive, just go for
term life insurance: $100,000 for permanent life insurance, $1,000,000 for a
10-year term insurance, $500,000 for a 20-year term insurance, and $400,000 of
30 years term. Now this is very practical as it covers all that's necessary. If
you die and the kids are 13 & 15 or younger, they will get $2M; if the age
is between 13-23, they get $1M; if between 23-33, they get $500,000; if after
that, they still get $100,000 for final expenses and funeral costs. This is
perfect for insurance needs that changes over time because as the children
grow, your financial responsibility also lessens. As the 10, 20, and 30 years
term expires, payment of premiums also expires thus you can choose to use that
money to invest in stocks and take risks with it.
In a world run by
the dictates of money, everyone wants financial freedom. Who doesn't? But we
all NEED financial SECURITY. Most people lose sight of this important facet of
financial literacy. They invest everything and risk everything to make more and
yet they end up losing most of it, if not all- this is a fatal formula. The best
approach is to take a portion of your money and invest in financial security
and then take the rest of it and invest in financial freedom.
Ultimately, your
financial plan is constantly evolving because you are constantly evolving. You
can't set a plan and then forget it. You need to keep an open eye on your money
to make sure it is working hard because that money needs to feed you for the
next 20-30+ years that you will be in retirement. You have to know how to feed
your money now so that it can feed you later.
Article
Source: http://EzineArticles.com/expert/Cleo_Patsy/2266317
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