Life Insurance Explained
Life insurance products are a cornerstone in any balanced financial portfolio. They help provide much needed stability and protection that other financial products just don’t offer. From helping to protect your family from unforeseen circumstances to passing wealth along to your loved ones, life insurance products can be an important component of your financial picture.
Puritan Life offers a wide range of life insurance products that can meet your needs.
Do I Need Life Insurance?
During our earning years, life insurance plays a vital role in protecting our family from the financial loss of the premature death of the breadwinner. As we age, typically our dependents become independent and we pay off the mortgage and other debts, so the need for life coverage for this purpose diminishes. During this life stage, life insurance can be used as an effective wealth transfer tool to leave a financial legacy for your loved ones and, in some cases, provide protection against later life expenses such as long term care.
How Does Life Insurance Work?
A life insurance policy, like all insurance, is a legal contract between the insurer and the policy owner where a benefit is paid to a designated beneficiary if an insured event occurs that is covered by the policy. In a life insurance policy, the insured event that triggers a benefit to be paid is the end of the life, or, in some cases, the terminal illness of the insured. In simple terms, if you own a life insurance policy, when you die an amount of money is paid to any person or entity that you name as a beneficiary.
Elements of a Life Insurance Policy
All life insurance policies have certain aspects that are common to them. Familiarizing yourself with these elements will allow you to be better educated and more equipped to make an intelligent decision in determining what policy best meets your insurance needs. The following are six of the elements and a brief explanation of each.
The death benefit is, just like it sounds, the amount payable to the beneficiary when the insured dies. Usually, the death benefit amount does not fluctuate. However, in some policies, the death benefit may increase or decrease.
The duration refers to the maximum time during which the policy’s coverage may continue, provided that the insured is still alive and that the policy is still in effect. Life insurance policies have a broad range of durations, from one-year term life insurance policies to whole life insurance policies that remain in effect until the insured passes.
The premium is the amount paid by the premium payer (who can be the insured or the policy owner) to the life insurance company. Like a policy’s death benefit, the premium can either decrease, increase, or stay the same during the duration of the policy. Premiums can run the spectrum from just a few dollars a month to large sums. The premium depends on elements of the policy including the amount of the death benefit and the length of the term.
The protection component is the difference between the death benefit and the cash value at any given time. For example, the death benefit is only paid when the insured dies, but the cash value of the policy is available to the policy owner when the insured is still alive. The difference between these two values is the protection value of the life insurance policy. For instance, if the death benefit is constant throughout the policy, but the cash value continually decreases, then the protection component is increasing throughout the duration.
The cash component is the cash value of an insurance policy. It is the value given to a policy owner if the policy is canceled prematurely. The amount of the cash value should always be specified in an insurance policy. Generally, the cash component increases over time in an insurance policy.
Dividends are different than those received on securities. With life insurance, dividends result when the insurance company’s actual life insurance costs turn out to be less than it assumed in setting the policy’s premiums. When this happens, the insurer may return a portion of your life insurance premium to you as a dividend. Dividends are not guaranteed, since the insurance company doesn’t know the actual costs in advance.
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