The goal of life insurance is to provide a measure of financial security for your family after you die.
Life insurance is a protection against financial loss that would result from the premature death of an insured. Life insurance is a contract between an individual with an insurable interest and a life insurance company to transfer the financial risk of a premature death to the insurer in exchange for a specified amount of premium. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured,
The key point to remember while purchasing Life Insurance policy is to consider following things
1) Funeral Cost and Final medical bills if any?
2) Living Standard of your beneficiary and dependents.
3) Any Loan payments
4) Any upcoming Education fees.
5) Any upcoming marriage expense.
It is very important to evaluate your life insurance policy annually as per major changes in life like marriage, divorce, birth of child, purchasing expensive items like house, diamonds or business.
Three component of life insurance
Death Benefit: The death benefit is the amount of money the insured’s beneficiaries will receive from the insurer upon the death of the insured. Although the death benefit amount is determined by the insured, the insurer must determine whether there is an insurable interest and whether the insured can qualify for the coverage based on its underwriting requirements.
Premium Payment: Using actuarially based statistics, the insurer determines the amount of premium it needs to cover mortality costs. Factors such as the insured’s age, personal and family medical history, and lifestyle are the main risk determinants. As long as the insured pays the premium as agreed, the insurer remains obligated to pay the death benefit. For term policies, the premium amount includes the cost of insurance. For permanent policies, the premium amount includes the cost of insurance plus an amount that is deposited to a cash value account.
Cash Value: Permanent life insurance includes a cash value component which serves two purposes. It is a savings account that allows the insured to accumulate capital that can become a living benefit. The capital accumulates on a tax-deferred basis and can be used for any purpose while the insured is alive. It is also used by the insurer to mitigate its risk. As the cash value accumulates, the amount the insurer is at risk for the entire death benefit decreases, which is how it is able to charge a fixed, level premium.