What Your Life Insurance Policy Really Means

A life insurance policy provides money to your family in the case of your death. Although it is the best way to make sure that loved ones are taken care, many people refrain from purchasing life insurance for a variety of reasons. The truth is that if your income provides your family with financial support, then there is no valid excuse for not having life insurance.

The Legal Details

You, the policy holder, and the insurer sign a contract that states that the insurer will pay a sum of money to designated loved ones, called beneficiaries, if you expire due to an insured situation. In order to secure this contract, you pay a periodic fee, called a premium. You can also pay the premium in one lump sum payment. Because the life insurance policy is a legally binding contract, certain situations that lead to death are explicitly covered by the policy and certain ones are explicitly not covered. It is also possible to buy a life insurance policy for someone else, whereby the purchaser becomes the owner of the policy, the person who’s death will be covered becomes the insured, and the insurer remains the same.

The Payments

The amount that you pay for a life insurance policy is based on calculations made by actuaries. If you have a high life expectancy, you pay less because you are a low risk for the insurance company.  If you have a low life expectancy, you pay more because you are a high risk for the insurance company.  Life expectancies are calculated through mathematical models that include many variables. Three of the main variables are age, gender, and if you are or are not a smoker.

The amount that your beneficiaries receive upon your death is based on the face value of your policy. Beneficiaries can receive payments in a lump some or as annuities, which are payments made periodically over time. The amount of money paid, and whether or not it is paid, is based on the type of policy that you have. If you have a term life insurance policy, your beneficiaries will only receive money if you die within a certain time. If you have a permanent life insurance policy, no matter when you die, your beneficiaries will receive payments. Within the category of permanent life insurance, you may own whole, universal, limited pay, or endowment insurance. Each of these determines how much money is paid and when the payments are given out. The payout in a permanent life insurance policy can increase as you age. If you own an accidental life insurance policy, your beneficiaries will only receive money if your death is the result of an accident, such as an injury.  

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