Money cannot replace a life, but it can make losing a breadwinner more endurable. Life insurance pays out a lump sum in the event that the policyholder dies. The amount paid out should be large enough to cover his or her dependents’ living expenses for a couple of years, outstanding debt, and future obligations like education. The money from a life insurance policy covers those expenses the policyholder would have covered him- or herself.
Life insurance policies don’t just cover the death of the insured, however. They include dread disease and disability cover. Should the insured be diagnosed with a dread disease (those listed on the policy usually including heart attack, cancer, stroke and other ailments), then the insurance company will pay out the value of the life insurance policy. The same is true for disability. Should the insured suffer a disability and be unable to work, the policy will pay out a lump sum or monthly fees depending on the insurance company and policy.
Life insurance policies can be divided into two main categories. Term life insurance and whole life insurance.
Term life insurance
Term life insurance may be a long-term insurance policy, but it expires when the policyholder reaches a certain age. Given that death is assured, certain life insurance companies cannot afford the risk, so they cover the policyholder until such time as his or her dependents are no longer reliant on him or her. Once the insured reaches a certain age (usually retirement), then the death benefit falls away.
Certain term life insurance policies will continue to cover the insured for disability and dread disease even after the death benefit expires. If the insured does not experience dread disease or disability then no payout is made. This is the principle difference between term and whole life insurance.
Whole life insurance
Whole life insurance is more accurately referred to as life assurance in that it guarantees a payout. The policyholder is assured that he, she or his or her dependents will receive money from the insurance policy. This type of insurance policy is an investment and carries a cash value (and can thus be liquidated). Normally a whole life insurance policy has a death benefi which expires when the insured reaches a certain age (usually around retirement), but instead of cancelling the benefit altogether, the policy will pay the insured premiums back in the form of dividends. These dividends can be bequeathed to dependents or beneficiaries.
Whole life insurance also includes dread disease and disability benefits, and because a payout is assured (either in the form of a death benefit or dividends), the premiums are much higher than a term life insurance policy.
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