How Does Life Insurance Work?

Life Insurance is a contract between an individual (generally the policyholder) and the insurance company (the insurer) where the insurer pays a predefined sum of money to the beneficiary after the death of the policyholder.

The sum of money paid to the beneficiary is in exchange for the annual premiums paid by the policyholder.

Having a Life Insurance ensures financial protection to the beneficiary or beneficiaries in case the policy policyholder dies so that there is no financial burden on the policy holder’s family. The policyholder pays the insurance company a regular amount of money monthly or annually, which is predefined while taking the policy, called premiums. The policyholder takes life insurance for his loved ones that could be his/her spouse, children or a business partner to prevent any financial issues that may arise after his demise. The insurance company agrees to pay a sum of money called the death benefit to the beneficiaries in exchange for the premiums paid by the insured in case of his/her untimely demise. The payout is tax-free.

There are two categories of Life Insurance: Permanent Insurance and Temporary Insurance.

Permanent includes Universal Life Insurance and Whole Life Insurance. This means that the insurance covers throughout your life and does not expire. Some Permanent insurance has a cash value component attached to it. The premiums are put into investments and also can be used as a savings account from where you can withdraw cash but with interest.

  1. Universal life Insurance

In this type, the insurance is for a lifetime but the premiums and death benefit are flexible. The policyholder decides on the amount of death benefit. The premiums paid monthly or annually can change. The policyholder can pay less premium if his financial position is not strong consequently the death benefit will also reduce and vice versa.

  1. Whole Life Insurance

In this type, the insurance is also for a lifetime but premium and death benefit is fixed at the time of taking the policy.

Temporary Insurance does not cover for a lifetime but has a fixed period until it is covered. Term Insurance comes under this category.

  1. Term Insurance

In Term Insurance, the insurance is covered until a fixed period of time say 10yrs, 20 yrs or 30 yrs. If the insured has taken a 30 yrs’ Term Insurance and dies within 20 years then the beneficiary receives the death benefit. But if the insured outlives 30 yrs then no benefit can be claimed. It does not involve the cash value component. The premiums and death benefit lower as compared to universal or whole life insurance.

Death Benefits

When the insured dies, the beneficiary can make claims to the insurance company, The claims are paid only after the insurer receives the death certificate as the death proof. If the insurer finds a reason to investigate around the cause of the death then he may do so to be assured of the genuineness of the case before paying the claims to the beneficiary.
Payouts can be made as a total sum or in equal intervals.

Leave a Comment