If you have ever heard of motor insurance, then there is the probability that you have also heard of life insurance. At its most basic value, insurance is the promise of reimbursement in the case of loss – in other words, insurance is a financial protection against a given future loss. It is basically the financial compensation you receive when something bad that you had always feared happens.
So while motor accident insurance seeks to reimburse a car owner in the case of damage sustained in an auto accident, a life insurance policy pays out a promised amount of money to the dependants of a deceased. But it doesn’t just happen automatically – not everyone will be compensated when they suffer any loss – only people who have signed up against the loss will benefit.
Definition Of Life Insurance
Life insurance is the contract between an insurance company (insurer) and a policy owner (insured) in which the insured pays monthly or yearly amounts (premium) to the insurer with the promise that the insurer will pay a larger promised amount (death benefit) to the dependents of the insured upon his death.
How Does Life Insurance Work?
To illustrate this concept, let’s say that JKL Insurance Company sells a life insurance policy worth $5 million to Mark Jones on the condition that the $5 million will be paid out to Jones’ dependants if he dies within 10 years. To make the contract valid, Jones must pay a monthly sum of $100 or a yearly sum of $1,200 as a premium to JKL Insurance.
The contract that is signed between both parties is known as the life insurance policy – the agreement outlines the terms and conditions of the contract.
So if Jones pays his monthly or yearly premiums faithfully and dies unexpectedly within the 10-year period, JKL Insurance Company will pay out the promised $5 million death benefit to his stated dependants who will be the beneficiaries of the fund.
But if he defaults on his payment within that period and then dies, he will lose his initial deposits and no amount whatsoever will be paid to his dependants by the insurance company.
If Jones does not die within the agreed 10 years, he will recoup his entire savings and the contract will expire; or he may extend the contract for another given number of years.
While there are no doubts that the insurer will pay the beneficiaries of the insured upon his death, financial experts believe that a life insurance policy is only as good as the financial muscles of the issuer company.
Types Of Life Insurance Policies
There are basically two major categories of life insurance. These two categories are further divided into other types to meet the specific needs and preferences of the customer.
It must be noted that some insured do not expect to die within the lifetime of the policy; they buy the life policy as a form of saving so that they can recoup their savings after the given number of years. Imagine signing up for a system that forces you to save $250 monthly for 10 years.
Here are the major types of life insurance policies available:
1. Term Life Insurance
Part of the scenario illustrated above is for term life insurance. With this policy, the insured chooses to insure his life for 10, 20, or even 30 years.
It is the simplest form of life insurance since the insured chooses the number of years he wishes to be covered and then pays a fixed or variable premium over the life of the policy. If the insured dies within this period, his assured death benefit is paid to his dependants.
There are three types of term life insurance and they are as follows:
- Level term: With this policy, the insured pays the same premium throughout the tenure of the policy, and the death benefit or sum assured remains fixed too.
- Decreasing term: Here, the death benefit reduces at a given rate as the years go by.
- Convertible term: Under this policy, the insured or policyholder can switch from a term policy to a permanent or whole life insurance over the course of the policy.
It is possible that insurers develop more insurance types under term as the decades go by.
2. Whole Life Insurance Or Permanent Insurance
This policy is called whole life or permanent life insurance because the policy remains in effect throughout the lifetime of the insured. It is not limited to 10, 20, or 30 years like term life, it is permanent for as long as the policyholder remains alive – even if he lives to 150 years.
It only ceases to be in effect if the insured stops paying his premium or revokes the policy. It is also more expensive than term life.
There are three or more types of whole life insurance policies:
- Cash-value life insurance: This life policy type accumulates cash value over the term of the policy, and the insured can use the cash to secure loans, obtain cash, or settle further premiums.
- Universal life policy: This policy offers variable premiums and earns interest on the amount paid up. The insurance company can adjust the premiums as the years go by, and the sum assured or death benefit can remain fixed, increasing, or decreasing as the policyholder advances in age.
- Variable universal life: This policy empowers the insured to invest the cash value of the policy in a separate account. This type of life policy can also enjoy modified premiums as the tenure ages and the sum assured can remain fixed or increase with time.
Life Insurance Agents And Marketers
You probably bought your life insurance policy through a life insurance agent or marketer. They are licensed professionals who sell life insurance policies and advise potential customers on the best policies that meet their financial goals.
Agents are marketers who usually work for insurance companies, but they can also be freelancers who source for business to earn commissions.
Working as an insurance agent is hard work. It involves a lot of hustling and networking and seminars before one or two sales are made; in many cases, insurance marketers face lots of rejections, but they remain persistent until they make a sale.
They may make cold calls and follow up on potential leads until they win the customer over. And they are usually salesy and try to convince prospects of the wisdom of purchasing a particular policy over others.
They equally explain the difficult financial aspects of any policy and offer advice on the best coverage options
Important Questions To Ask Your Life Insurance Agent
There are certain questions you should ask your life insurance agent before you decide on purchasing any particular policy. Some of these questions are:
- What type of life insurance policy should I buy?
- How much does it cost to purchase a life insurance cover?
- How much life insurance do I need?
- Does the life policy provide living benefits in addition to death benefits?
- When can I look forward to financial returns on my policy?
- What happens if my health status changes?
- What if I need more coverage in the future?
- What insurance company has the financial muscle to provide a cover?
The ability of your life insurance agent to answer these questions comprehensively and to your satisfaction should determine whether you should buy the cover. The legacy of the insurance company he represents should also be a factor in helping you to decide on any policy.
You must however understand that your guaranteed benefits or sum assured and premiums depend on variable factors such as your age, sex, job, lifestyle, family size, and health status.
Selling Your Life Insurance Policy
Believe it or not, there might come a time when you feel like selling your life insurance policy. You may want to sell your life insurance policy because you need cash to meet some urgent needs, or you desire to reduce/eliminate premium payments.
A life insurance policy may be sold directly to an insurance company or through a broker who is a third party. The broker gets paid a commission by the buyer after the deal is sealed.
There are two major categories of life insurance policy sales. The first is called Life Settlement in which the policy is sold by a healthy holder who needs the cash value of the plan, and the second is called Viatical Settlement in which the policyholder is ill with a terminal disease that requires cash for living and medical expenses.
Whatever the case, the proceeds from the sale of a life policy are usually discounted or lesser than what the actual worth should be.
Alternative Options To Selling Your Life Policy
Before considering the pros and cons of selling a life insurance policy, let us examine alternative options to selling your plan:
- Take a personal loan
- Surrender the policy
- Take a loan against the cash value of the policy
- Accelerate the term of the plan
If you do not wish to explore any of the above alternative options, you must prepare fully to sell your plan by following these tips:
- Understand the entire selling process
- Consider hiring an independent adviser
- Find a reputable broker to help you
- Consider multiple offers from buyers
- Round up your paperwork
If everything is done perfectly, any subsequent action you take to either sell or explore alternative options will be to the best of your advantage. But if you are still selling, let’s consider the pros of selling your life insurance policy.
Pros Of Selling Life Insurance Policy
Here are some of the benefits of selling your life policy:
- Obtain a large cash amount that can be used for any personal purposes
- Instead of allowing the policy to expire and getting nothing in return, you recoup your entire savings
- Get a larger amount by surrendering your policy to the insurer
- You are freed from the continuous payment of premiums
- It is possible to undo or reverse the sale after some days if you change your mind
Cons Of Selling Life Insurance Policy
Here are some of the disadvantages of selling your life plan:
- By selling your policy, your dependents won’t receive any death benefit at your demise
- It is possible that you pay taxes on your life settlement
- Brokers and life settlement companies charge fees and commissions for assisting you
- You may become unfit for Medicaid or other financial incentives if you have a life settlement
- You may be mandated to provide personal and medical information to the buyers
- Your creditors may claim the proceeds from the sale
- Comparison shopping takes time and getting a suitable buyer may take months
It must be noted that selling your life insurance policy is not very easy; it may take several months depending on the complexity of the policy and the amount you wish to sell it for. The number of offers you get and the quality of the offers will determine if you sell or not within record time.
However, if you don’t mind receiving a very low amount, you may sell to the first or second offer that comes to you. A broker will make the offers come faster. A broker or life insurance settlement company will serve as the middleman for a fee or commission on the sale. They will introduce you to offers from investors who look forward to cashing in on your death benefit when you die.
Most investors who buy life policies prefer buying from aged folks who are above the age of 65 since they could die anytime soon. They also want to buy life policies that have high settlement value and from insurance companies with high ratings. Sometimes they may consider universal life policies where the premium is low and flexible so that they can pay lower and fewer premiums on the plan.
Photo by ANTONI SHKRABA