Life insurance : how it works
At every moment life can be challenging, but a good financial planning like life insurance can help us & our family to prepare for it.
We love our life and also our family .If any unexpected events happening could our family continue to live in our home? Would our children have the funds to what is life insurance policy continue study? We know at any time the unforeseen events could happen — have we any future plan to help for our family’s future if they must go on independently?
Life insurance is the only thing that stands between our loved ones and financial hardship.
A life insurance is an agreement with an insurance company. The insurance company provides a claim amount in exchange for premium to beneficiaries upon the insured’s death , known as a death benefit.
How to determine which type of and how much life policy is appropriate for a person .
For a specifics life — age, income, and other factors — will help determine which type of and how much life insurance is appropriate for a person.
Importance of life insurance?
Life insurance may help lighten the financial burden.In case something unfortunate happens to the insured, the life insurance will provide money directly to the beneficiaries. A life insurance doesn’t only provide protection, but also is a form of financial planning, as the beneficiaries could use the money for:
- Making up for lost income
- Funding a child’s education
- Paying off household debt
Certain types of life insurance may provide benefits for policyholder while insured are still living. Some policies will offer a payout upon maturity or when surrendering.
Life Insurance Contract:
Life insurance is not a contract of indemnity.The loss of life cannot be compensated and only a specified sum of money is paid. In life insurance agreement the policy amount is definitely paid, when insured or beneficiary will submitted the claim . The claim amount becomes payable on the expiry of a certain fixed period or on the death of the insured , whichever is earlier.
To conclude, Life insurance is a contract by which the insurer undertakes to pay a certain sum of money , in consideration of a premium,on the death of a person or on the expiry of a certain period, whichever is earlier.
Fundamental principles of life insurance.
These principles are:
Essentials of a Valid Contract:
According to Contract a valid contract must contain the following essentials:
- Offer and acceptance.
- Capacity to contract.
- Free consent of parties.
- Lawful consideration of object.
- Contracts not specifically declared void.
Utmost Good Faith:
The life insurance contract is a contract of utmost good faith. The insured should be honest and truthful in giving information to the insurance company. He knows more about the subject-matter of the contract than the other party (the insurer).
Consequently, he is under a duty to disclose accurately all material facts known to him to the insurer. Concealment of any fact will entitle the insurer to deprive the assured of the benefit of the contract.
In life insurance, the insured must have insurable interest in the life insured and insurable interest must be appear at the time when the insurance is executed. It is not necessary that the insured should have insurable interest at the time of maturity also.Without insurable interest the insurance policy is void.
In the following three cases insurable interest is presumed and no proof is necessary, viz.:
- Own life
- Husband in the life of wife, an
- Wife in the life of husband.
The following areas have been held to have insurable interest:
- A person is presumed to have an interest in his own life and every part of it.
- A loan holder has an insurable interest in the life of his debtor,
- A proprietor of a drama company has an insurable interest in the lives of actresses.
- A employee engaged for a term of years has insurable interest in the life of his employer.
Procedure of a effective Life insurance
A number of steps are taken to effect a life insurance policy.These steps are:
- Proposal: It is important to take a proposal form before taking a life insurance policy.The form contains a number of questions about the mode of premium paid, health of the person and family background etc.
As we know that the contract of insurance is based on utmost good faith. So the proposer must answer all the questions correctly. He should not conceal any factual information. Concealment of any fact will entitle the insurer to deprive the insured of the benefits of the contract.
- Medical Examination: After the proposal form has been submitted, a medical examination of the person to be insured is arranged. Such examination can be conducted only by a doctor approved by the insurance company. The medical report of the applicant is directly forwarded by the doctor to the office of the company.
- Acceptance of Proposal: The proposal form is sent to the company along with medical report and the comments of the insurance agents. The proposal form is scrutinized by the company and if the company is satisfied, the proposal is accepted.
- Proof of Age: The applicant has to furnish satisfactory proof of his age to the insurance company.The proof of the age can be furnished through any one of the following:
- National Identity Card
- Birth Certificate from proper authority
- A certificate of High School
- Valid Passport
- Service Book
- Marriage Certificate
- Premium: When the proposal is accepted, it is intimated to the applicant and he is asked to make the payment of premium. On the payment of premium the policy comes into operation and the risk is covered then onward.
- Insurance Policy: After receiving the installment of first premium, the insurance company prepares the insurance policy.
It bears the signatures of the officials of the insurance company. When the policy is ready, it is sent to the insured by registered post. It contains the assureds’ name, address, occupation, age, amount of insurance, number of installments, amount and date of premium, etc.
Various types of Life Insurance Policies:
The life insurance policies are of the following types:
whole Life insurance
Under this policy, premium is payable throughout the life time of the life assured. The sum assured becomes payable only on the death of the insured. These policies are taken out to make provision for the dependents. This policy is also called ‘Ordinary Life Policy’.
This is most popular form of life insurance. Endowment Life Insurance policies are a mix of term life insurance and permanent life insurance.This policy is taken up for a specific period known as ‘endowment period’. Endowment Life Insurance provides coverage over a specific period, while offering surrender and maturity benefits.You will receive a lump sum payout at the end of a chosen period. Some policyholders have used this kind of policy to save a specific sum for their children’s higher education.
Term Life Insurance
Term Life Insurance provides coverage for a chosen period. This type of life insurance only offers the insured payout to the beneficiary upon the death of the insured within the chosen period. The policy will lapse if the policyholder stops paying insurance premiums. Term life insurance is comparatively more affordable, as it doesn’t offer any maturity payout.
A term life insurance is an ideal choice for those who need to protect their family from financial risks over a specific period of time, such as during loan repayment.
Permanent Life Insurance
It offers coverage for the whole life of the insured. The policyholder has to pay insurance premiums either for a specific time period or throughout their lifetime. Permanent Life Insurance will provide a payout to the beneficiary of the policyholder in case of insured’s death. It also offers a surrender value if the policyholder chooses to lapse the policy before its maturity.
Some Permanent Life Insurance policies also offer a regular pension payout after contributing for a certain period. Such pension payouts can be received monthly, quarterly, semi-annually or annually.
Joint Life Policy
This policy implies to husband and wife or the partners of a business. They can have a joint policy. It is like Endowment Policy. Under a Joint Life Policy (on two or more lives) the sum insured is payable at the end of the endowment term or on the first death of any one the lives insured, whichever is earlier. Such policies are usually taken by partnership firms to provide for the payment of the capital of the deceased partner.
With or Without Profit Policy
Life insurance may be ‘with profit or ‘without profit’. The insured is entitled to the share in the profits of the insurer if the policy is a ‘with profit policy. Contrary to this, in case of ‘without profit policies, such a question does not arise.
Under annuity policy, the amount is payable by the insurer not in lump sum but by monthly, quarterly, half-yearly or annual installments which are paid either until death or for a specified number of years. This policy is very useful to those persons who desire to provide a regular income for themselves and their dependents after the expiry of a specified period.
Sinking Fund Policy:
These policies are mostly taken by firms and companies to accumulate funds to pay off a liability or for making a provision for the replacement of an asset after a period of time.
Convertible Whole Life Policy:
This policy is issued as a whole life policy with a provision to convert it into an Endowment Policy after the expiry of a specified period (say 5 years). If this option is not exercised, the policy continues as a whole life policy with premiums ceasing at a certain age.
Group Insurance :
This policy is taken out for the protection of lives of all employees in a business concern. One policy is issued to the employer with individual certificates indicating the amount of insurance protection of each employee. Dependents of the employees are entitled to the benefits of these insurance policies.
What types of death does life policy cover?
Standard life insurance cover almost all cases of death due to illness, accident or natural causes. However, there are a few big exceptions life insurance shoppers and policyholders should know about.
Which Death life policy does not cover?
Generally, life insurance would not cover deaths found to be related to the following causes:
- The death is a result of suicide : Most policies contain a clause stipulating a beneficiary’s claim will get rejected if the policyholder dies within two years of their coverage’s start death and their death is ruled a suicide.
- The policyholder was murdered by their beneficiary : On top of insurance company policies, most states have a “slayer statute” that prevent beneficiaries from receiving a life insurance payout if they intentionally caused or played a role in the policyholder’s death.
- The death was a result of criminal activity : Almost all policies contain a clause excluding death related to a policyholder’s willing participation in a crime. So, for instance, if someone robs a bank and gets killed during the robbery, their life insurance coverage would not pay out to their beneficiary.
What does life policy not cover?
It doesn’t cover application fraud discovered during a policy’s first few years.Life insurance policies come with what’s known as a contestability period. That’s a period of time (usually two years) after your policy goes into effect when the insurer can review your application for fraud.
If you die within your contestability period and your insurer discovers you misrepresented something on your application, your beneficiary’s claim can get denied or reduced by the amount of money you should have been paying in premiums.
Contestability periods exist primarily to protect insurance companies from fraud. They generally only come into play when the policyholder’s death is suspicious, but there are two big things about contestability periods to note:
- Any misrepresentation can cause a claim denial. It doesn’t have to relate to cause of death. If insurer investigates the death in a car accident and discovers you didn’t disclose a past smoking habit, they could deny the beneficiary’s claim.
- Contestability can affect active policies, which is to say, if your insurance discovers you misrepresented something on your application within the first two years and you haven’t died, they can cancel your policy or up your premiums to account for whatever was discovered. These premium adjustments are often retroactive.
It’s important to disclose everything to your insurer during the application process.
PRIVILEGES OF THE POLICYHOLDER
Optional Policy Benefits
The following benefits are subject to underwriting.
Waiver of Premium
Waives the payment of all premiums that come due during the disability of the insured person. For premiums to be waived, total disability must exist continuously for a period of six months and result from an accident or sickness. Total disability is defined in the terms of the policy contract. Available for insured persons ages 0-59.
Indexed Protection Benefit
Increases the policy’s death benefit in years two through ten of the policy. The increase is based on the Consumer Price Index with an annual cap of 8%. Available for insured persons ages 0-75.
Additional Purchase Benefit
Guarantees the right to buy an additional permanent policy at specified dates without evidence of insurability. Available for insured persons ages 0-38.
Accidental Death Benefit
Increases the policy’s death benefit if the death of the insured was accidental. Available for insured persons ages 0-65.
Premiums on a minor’s policy are waived until the policy anniversary nearest the insured’s 25th birthday if the individual paying the premiums dies or becomes totally disabled(2), before his or her 60th birthday. Available for insured persons ages 0-14 when the payer is ages 18-55 and is responsible for the support of the insured.
Dividend using benefit
You may choose to use your policy dividends in multiple ways. Most policyholders choose to purchase additional coverage with their dividends increasing the policy’s face amount and cash value. Other way to use dividends is to adjust premium payments. A third option is to accumulate your dividends at interest. Or you can select to accept your dividends in cash.
Policy loan benefit
You may take a loan from the cash value of the policy. Loans may be taken at a fixed interest rate, or a variable loan rate determined annually. The amount lend from the cash value affects the dividend amount you will receive. Any unpaid debts, along with accumulated interest, will be adjusted from the proceeds at death or if the policy is surrendered prior to death. Within contractual limitations, there is a maximum value that can be borrowed that is less than the entire cash value of the policy.
To secure yourself if you are ever unable to pay your policy premiums, you can select one of our four non-forfeiture options. You must let your agent know which option you want included when you apply.
Automatic Premium Loan
Money is automatically lend from the cash value to pay outstanding premiums and interest is charged until the loan is refund. If this option is not selected, or if the cash value will not sufficient the premium amount, the non-forfeiture option will default to Extended Term Insurance.
Extended Term Insurance
Extended Term Insurance—Keeps the full death benefit in force by using the cash value of the policy to buy Extended Term Insurance. The term insurance remains in force until the cash value from the Life policy no longer covers the daily term insurance charges. Coverage then terminates.
Keeps some level of protection in force by using the policy’s total cash value to buy paid-up whole life insurance. The amount of the paid-up insurance will be less than the face amount of the Life policy. The paid-up policy keeps in force until the insured dies.
Select to accept the policy’s cash value by surrendering the policy. Any overdue loan balance and accrued loan interest will be adjusted from the cash value.
The life insurance is not only a financial security but is a type of investment because a certain sum is returnable to the insured at the death or the expiry of a period.