Life Insurance Basics
A life insurance policy is a contract between you and your life
insurance company. The contract typically protects those who are financially
dependent on you: if you die, the insurance company pays your beneficiaries
the policy’s stated death benefit. Some types of life insurance
also offer a savings component, called cash value.
Typical reasons to buy life insurance:
- Income replacement: If you have dependants who rely on your
income, you should consider what would happen to them if you die.
Proceeds from your life insurance policy will offer your dependants
financial stability and a chance to readjust to a life without you.
- Final expenses: hospital bills, burial, funeral.
- Outstanding debts and long-term financial obligations: Life
insurance can be used to pay off any outstanding obligations you might
have, like credit card debt, mortgage payments, etc.
- Estate planning: The proceeds of a life insurance policy
can be used to pay for transferring and administration of property.
The larger and more complex your holdings, the larger the administration
expenses are likely to be.
- Cash values: Some types of life insurance policies offer,
in addition to the death benefit, a component called “cash values”.
Prior to your death, this cash value belongs to you and can benefit
you in various ways. You can withdraw money or use the policy as a
collateral for a loan from the insurance company. When you get older
and the life insurance policy doesn’t have an income replacement
function anymore, you can use the policy as a supplement to your retirement
benefits. The amount you use, however, will be subtracted from the
death benefit.
There are several types of life insurance policies, which can
be grouped in two main categories:
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