What is life insurance? | How are Life Insurance Premiums Determined?

What is life insurance?

Is anyone dependent on you financially? What would happen if you die unexpectedly leaving dependents behind? Life insurance will protect whosoever is dependent on you financially. Life insurance helps pay off debts or reimburse for loss of income as a result of your death.

According to LIMRA, thirty percent of Americans know they need life insurance, and 25% wish that their spouse or partner would purchase more life insurance.

Reasons Why People Buy Life Insurance

The following are major reasons why people buy life insurance:

  1. Protection for Home and Family: Life insurance provides financial protection for your dependents to ensure they are not held bondage by mortgage or other debts.
  2. Protection for Your Business: Life insurance will help keep your business afloat.
  3. Protection for Your Heirs: If you are a person with high net worth, you will definitely be subjected to estate tax. Life insurance can help your heirs pay the taxes rather than selling off your assets.

Related:  What is permanent life insurance

The two major types of life insurance are:

  1. Term Life Insurance, and
  2. Whole Life Insurance.

Most consumers in America prefer the Term Life Insurance because it is much affordable. Term insurance covers you for a specific amount of time, and the payout can be used to cover any expense in case you die.

Take a look at a sample annual life insurance for healthy people:

For a 30 year old male:

Policy amount    20-year term life30-year term life

For a 30 year old female:

  Policy amount 20-year term life30-year term life

How Life Insurance Quotes Are Determined

Life expectancy is the basis upon which life insurance quotes are determined by life insurance providers. Anything that can potentially shorten your life expectancy will ultimately lead to a higher price. This includes:

  • Your current age,
  • Your sex. (Women tend to live longer than men)
  • Smoking (do you smoke?)
  • Current health conditions such as high blood pressure, heart disease, etc.
  • Family health history e.g. if one of your parents has had or have cancer or diabetes.

5 Important Definitions to Know When Buying Life Insurance

  • Premium: This is the price you pay for life insurance. Premiums can typically be paid monthly, quarterly or annually.
  • Policy value: Also known as the Death Benefit. This is the amount of payout. This is the amount the life insurance policy pays out if you die.
  • Beneficiary: The person chosen to receive the life insurance payout, such as a spouse or a child.
  • The insured: The person whose life is insured. The policy pays out if the insured person dies.
  • Policyholder: The person who owns the life insurance policy and is responsible for payments. The policyholder is the only one who can make changes to the policy, such as changing the beneficiary.

Want to know more about Life insurance? Here is everything you need to know about life insurance


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