There are some things in life that humans have control over. They cannot stop certain events from happening. But, they can take some precautions to make sure these events don’t happen. Even then, if these events start to happen, there is nothing that can be done to stop them. In situations like these, the most obvious choice would be to minimize the damage. These events can also lead to huge financial losses, which is where insurance comes in. One type of insurance is life insurance. So here are its own advantages and disadvantages.
WHAT IS INSURANCE?
It can be termed as a form of risk management. Insurance is a contract that works as a means of protection from financial loss. It is represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. It covers damage to the insured or her property, or from liability for damage or injury caused to a third party.
The provider of insurance is known as an insurer, insurance company, insurance carrier, or underwriter. A policyholder is a person or entity who buys insurance. They are also known as the insured.
WHAT ARE THE TYPES OF INSURANCE?
There are various types of insurance. Types of insurance are mostly classified on the basis of the nature of the insured. These include auto insurance, gap insurance, health insurance, income protection insurance, casualty insurance, burial insurance, property, liability, credit, and more.
Auto insurance covers the financial loss involving a vehicle owned by the insured. This usually includes damage to or theft of the car, liability coverage for the legal responsibility to others for bodily injury or property damage, and medical coverage. Gap insurance covers the excess amount on your auto loan in an instance where your insurance company does not cover the entire loan. The cost of medical treatments is covered by health insurance. In most developed countries, all citizens receive some health coverage from their governments, paid through taxation. Health insurance is also often part of an employer’s benefits.
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Property insurance provides protection against risks to property, such as fire, theft, or weather damage. There are also sub-types of property insurance. They are specified to cover certain threats, such as fire, flood, earthquake, et cetera. Credit insurance is taken to repay loans in the event of insolvency. There are types of credit insurance as well. Mortgage insurance insures the lender against default by the borrower. Trade credit insurance is business insurance over the accounts receivable of the insured. The policy pays the policyholder for covered accounts receivable if the debtor defaults on payment.
Life insurance is another type of insurance policy.
WHAT IS LIFE INSURANCE?
As the name suggests, life insurance provides protection from the financial damages caused due to loss of life. It provides a monetary benefit to a deceased person’s family or other designated beneficiary. In some cases, it also covers burial or funeral expenses, in addition to an income to the insured person’s family. The beneficiary can choose to collect the money in a lump sum cash payment or in regular installments called an annuity.
WHAT ARE TYPES OF LIFE INSURANCE?
There are various sub-types of life insurance policies. A term insurance plan is purchased for a fixed period of time. This policy turns beneficial only on the occurrence of the event. Another life insurance plan is an endowment policy. The only difference between the term insurance plan and the endowment policy is that endowment policy comes with an extra benefit. In an endowment policy, the policyholder receives a lump sum amount on the date of maturity, even if the insured event does not occur. Other types of life insurance plans, such as unit-linked insurance plan, money back policy, whole life policy, and annuity/pension plan.
Advantages of Life Insurance
Peace of Mind
The most common reason that people get life insurance is to ensure that their loved ones are looked after in their absence. This policy allows the policyholder to leave behind financial support for their family members. This is even more helpful when the insured is the sole breadwinner of the family. If the insured person is diagnosed with a terminal illness, this peace of mind becomes even more important. When the threat of death looms over the breadwinner in the family, the stress of the rest of the family not being looked after worsens their condition. If they are assured that no matter what happens to them their family will be okay, it allows them to focus on other things.
This also gives some peace of mind to the rest of the family members. This is because they wouldn’t have to hunt for scraps after the policyholder is gone. They would be able to live their life with a certain sense of comfort. Again, this is even better if the policyholder is the sole earner of the family.
Along with providing financial security to the policyholder’s family after their death, a life insurance policy also provides certain tax benefits. It mainly provides 2 tax benefits: a tax-free death benefit and tax-free cash value growth.
Generally, beneficiaries don’t have to pay taxes on the money they receive from the policy. High net worth individuals can then buy life insurance to avoid tax cuts while leaving behind an inheritance for their family. Death benefit payouts are tax-free in most cases. Additionally, a life insurance policy also allows for tax-free cash value growth. So interest on a cash value policy account grows without the policyholder having to claim it on their taxes. People who want to access their cash value can borrow it from this account tax-free in most cases as well.
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Flexible Financial Security
Life insurance policies allow flexibility in two forms. They are flexible in terms of the ways that they can be used in. They are also flexible in their specifications. Beneficiaries of a policy can wield the death benefit payout to cover whatever expenses they wish. They can use the money to pay their mortgage, send their kids to college, as well as even keep food on the table.
Some life insurance policies offer flexibility for the policyholder as well. For instance, universal life insurance allows you to adjust in premiums and death benefit payout as needed. In some cases, term life insurance policies also come with a conversion. They can be converted to provide lifetime coverage. Some policies also allow the policyholder to receive the death benefit on being diagnosed with a terminal illness.
Disadvantages of Life Insurance
Even though it is cheap, life insurance does cost money. It requires the policyholder to withdraw a certain amount from their income every month and pay it to the insurer. In certain cases where the death benefit payout is not guaranteed, such as in term policies, this money will have gone to waste.
Since it pans out over decades, and sometimes an entire lifetime, buying a life insurance policy requires a lot of planning and research. Buying the right policy could mean understanding how life insurance works, the various policy types, and the differences between each insurer’s specific products. For starters, the application process can take several weeks, and the policyholder may have to take a life insurance exam. Even if the insured chooses a no exam policy, they have to think about the decades to follow.
It’s also essential to buy with an insurer that prove their financial stability. The longevity of a firm is a good criterion to choose an insurer.
Pros and Cons of Life Insurance
|Peace of mind||
|Flexible financial security||