Evaluating Life Insurance Policies and Provisions

Life insurance is defined as the contract between an insured and an insurer or insurance company, where the latter promises to pay a designated beneficiary a sum of money upon the death of the insured individual. In some contracts, additional provisions or stipulations are integrated in the contract of insurance such as additional risks or events that would guarantee payment of benefits such as terminal illness or critical illness.

The provisions on a contract of life insurance depends of the personal situation of the insured. Life insurance is taken by people with dependents who would have difficulties in providing for themselves if the insured perishes. Thus, if an individual do not have any dependent or if he does not generate a significant percentage of the family’s income, it is more likely that he does not need a life insurance at all.

Life insurance is important for people whose salary is used to support the family, pay the mortgage or other recurring bill, education and others.

The amount of life insurance needed by an individual depends on several factors such as the insured’s other sources of income, number of dependents, debts and lifestyle. Generally, the amount of life insurance must be commensurate to 10 times the insured’s annual salary.

Studies suggest that if the insured is under 40 years of age and does not have a family, a disposition for a life threatening illness, he must be insured under a term insurance which offers death benefit but with no cash value. The following are the kinds of term insurance:

  • Whole life insurance – this is the traditional life insurance policy. The premium for this policy stays the same over the life of the policy and stays in effect until the death of the insured. The insured does not have control on how said premiums are being invested by the company.
  • Variable life – here, a build up of the cash reserve occurs which the insured can invest in any of the choices offered by the company. The value of the cash reserve depends on how well does his investments are doing.
  • Universal life – the amount of premium in a universal life insurance varies by using a part of the accumulated earnings to cover part of the premium cost. The amount of death benefits can also be varied.

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