What Is Life Insurance And How Does It Work.A Life Insurance is a contract between a certain person and an Insurance company in which the insurance company promises to pay a stated sum of money either on his death or on his attainment of a certain age provided the premium is paid for the duration of the contract. The bank also grants loan against life insurance policy.
What Is Life Insurance And How Does It Work
- Easy Valuation:
The valuation of policy is easy. The bank can get information from the insurance company in this regard.
- Easy Supervision:
The supervision of a policy that is delivered to the banker is simple; the banker has only to keep an eye on the premium payments.
- Assignment:
A life insurance policy can be easily assigned to anybody including a banker. By such an assignment, the banker becomes entitled to receive payment on maturity or death of the borrower.
- Re-acceptance:
The bank can present an insurance policy again to another person or institution in the hour of need.
- Surrender Value:
The surrender value of the policy increases with the maturity of the policy and thus the value of the security automatically increases to cover the accruing interest on the amount advanced.
PRECAUTIONS And Restrictions of Life Insurance Policy
- Restrictions on Assignment:
The banker should make it sure that there are no restrictions on the assignment of the policy. Moreover, all the provisions or terms should be clear to the bank.
- Payment of Premium:
The bank should check whether the premium is regularly paid or not. It must get the receipts issued by the insurance company for record.
- Admission of the Age:
The banker should see that the life insurance corporation has admitted the age of the insured. If not, he should get the age admitted before loan is sanctioned.
- Endowment Policy:
The bankers should prefer endowment policy to whole life policy as there is a definite maturity date in case of the endowment policy whereas in case of whole life policy money is payable only in the event of death of the insured.
- Margin:
General, the banker advances up to 85% of the surrender value of the policy. However, the banker may exceed this percentage particularly when he is confident of regular payments of premium.
- Repute of Insurance Company:
The bank should give loan only against the insurance policy of that company which has good repute and financial position.
[DISADVANTAGES]
- Explanation of Facts:
The insured must explain all the facts relating to him in insurance policy. If the insured does not do so then the insurance company can terminate the insurance policy and the bank has to sustain loss.
- Payment of Premium:
If the insured does not pay the insurance premium as per policy to insurance company then the insurance policy is automatically cancelled and the bank suffers loss.
- Irregular Cause of Death:
If the insured commits suicide or hanged by the honourable court then the insurance company terminates the policy. In this case, the bank suffers loss.
Life insurance is a contract between an individual (the policyholder) and an insurance company. The policyholder pays regular premiums to the insurance company, and in return, the insurance company promises to pay a sum of money (the death benefit) to the designated beneficiaries upon the policyholder’s death. This death benefit can help replace lost income, cover educational expenses, pay off debts, or even provide for funeral costs.
Types of Life Insurance
1. Term Life Insurance
Term life insurance is the most straightforward form of life insurance. It provides coverage for a specific term, usually between 10 and 30 years, at a fixed premium. If the policyholder passes away during the term, the beneficiaries receive the death benefit. However, if the policyholder outlives the term, the coverage expires, and no benefits are paid.
2. Whole Life Insurance
Whole life insurance offers lifelong coverage. As long as the policyholder continues to pay premiums, the policy remains in force. In addition to the death benefit, whole life insurance policies also accumulate cash value over time. This cash value can be accessed through withdrawals or loans and can provide additional financial flexibility.
3. Universal Life Insurance
Universal life insurance combines the features of term and whole life insurance. It offers a death benefit and a cash value component. However, universal life insurance policies provide flexibility in premium payments and death benefit amounts. Policyholders can adjust their coverage and premiums as their needs and circumstances change.
4. Variable Life Insurance
Variable life insurance allows policyholders to invest the cash value portion of their policy in various investment options, such as stocks and bonds. The policy’s cash value and death benefit can fluctuate based on the performance of the chosen investments. Variable life insurance offers potential for growth but also carries greater risks.
How Does Life Insurance Work?
Life insurance works on the principle of risk pooling. When individuals purchase life insurance policies, they contribute premiums to a larger pool of funds managed by the insurance company. This pool of funds is used to pay out death benefits to the beneficiaries of policyholders who pass away.
Insurance companies determine premiums based on various factors, including the policyholder’s age, health, lifestyle, occupation, and the type and amount of coverage requested. Younger and healthier individuals generally pay lower premiums since their risk of death is lower.
When a policyholder passes away, the beneficiaries must file a claim with the insurance company. The insurance company then evaluates the claim to ensure it meets the policy’s requirements. Once the claim is approved, the beneficiaries receive the death benefit, which they can use as necessary.
It is important to note that life insurance policies may have exclusions or waiting periods for certain types of death, such as suicide within the first two years of the policy. It is crucial to review the policy details and understand any limitations or restrictions before purchasing life insurance.
Conclusion
Life insurance plays a crucial role in providing financial security to individuals and their loved ones. By understanding the various types of life insurance, including term life, whole life, universal life, and variable life, individuals can choose the coverage that best meets their needs. Life insurance works by pooling funds from policyholders to provide a payout (death benefit) to beneficiaries upon the policyholder’s death. It is essential to carefully review policy details and consult with insurance professionals to ensure adequate coverage and peace of mind for the future.