Although optional, getting life insurance is one of the surest ways of safeguarding the future of your beloveds once you pass on. It guarantees financial security to your family, ensuring they cope with life in your absence without struggling too much.
According to a 2019 Insurance Barometer Report, most people are wary of life insurance citing its costliness. The perception, which often is misleading, is that the policy is expensive yet assures little value when the risk it covers occurs. But that stems from the fact that how life insurance works can be a novel or even confusing concept to many.
In this article, we discuss all you need to know about life insurance relating to how it works to keep you in the know.
What is Life Insurance?
Life insurance is a type of financial contract that occurs between two parties namely, the insurer and the insured.
The insurer is an insurance firm that offers to provide financial security following the death of the policyholder. On the other hand, the insured is the person whose life is covered, meaning if they pass away, the policy pays out.
There are two main types of life insurance policies: term life and Whole of Life. As the name suggests, term life provides a cover for a fixed period or term. For example, if you’re insured for ten years, your beneficiaries will get benefits only if you pass on within that period.
Whole of Life insurance provides cover for the rest of your life as long as you continue to commit to the contract by paying your monthly premiums. Usually, it is costlier than the term life insurance but that translates to more benefits. For instance, some whole of life insurance covers build a cash value that doesn’t expire in the course of your contract.
Origin of Life Insurance
According to ThinkAdvisor, life insurance originated from ancient Rome around 100 B.C during the leadership of Caius Marius, a military man. Its purpose was to raise funds that would cover the expenses of burial following the unexpected death of a troop member. Later, the concept was borrowed by neighboring governments thereby evolving into what we know it today. That is, providing a stipend to the beneficiaries of a deceased.
The cost of life insurance
How much money do you need to get life insurance? Well, the cost of life insurance is dependent on an individual’s coverage needs and the level of risk around their life. Some of the factors that influence an insurer’s decision on how much to charge for the premiums include your health, age, hobbies, and occupation.
The bottom line is the more likely you are likely to pass away during the policy’s term, the higher your premium rates might be. This means healthier people working or living in less risky environments often pay less than those who are in high-risk situations.
The above also explains why most life insurance providers charge younger people fairer than older ones. The assumption is that the former are less likely to pass away sooner than the latter.
Even then, it’s not uncommon for younger people to be charged more than the elderly. For example, when a young person has a life-threatening medical condition at the time of application, the provider might see that as a high-risk situation and charge higher premiums.
In some cases, your insurer may ask you to undertake a mandatory life insurance medical exam. The test is crucial for assessing your level of risk so that you get a sufficient cover. Still, you can get a life policy without the medical exam but the premium rates are typically higher.
Who should get life insurance?
All life insurance policies purpose to solve financial problems that may arise when people pass on. Whether anyone depends on your income or not, your demise will attract costs that need to be met. Those can burden your spouse, parents, children, or other close people who might be unprepared.
Here, we highly recommend that every person takes out life insurance to prepare for the inevitable risk of death. If you’d like to know more about how this coverage works, feel free to reach out to us and we’ll be more than happy to advise.