Finance

Life Insurance: What does it Really Entail?

In the old days before the arrival of civilization, life was extremely difficult both in terms of cost and many other things. But thanks to the modern advancements which not only pushed technology to greater heights but also the financial sectors – like insurance to be more precise.

Many decades ago, you could lose your family’s only breadwinner and then face extremely unforgiving consequences. Today, the concept of life insurance has made everything incredibly manageable. Life insurance allows millions of orphans to complete their studies and in many cases, put food on their tables as well. Life insurance has also given millions of widows across the world, unbelievably decent lives despite the untimely deaths of their husbands and other associated breadwinners.

Life Insurance
Life Insurance

By reading this piece up to the end, you’ll be able to find the answers to many life insurance-related questions and most importantly – the reason as to why life insurance is not a contract of indemnity.

So, what is Life Insurance?

Life insurance is a contract between an individual (The Policyholder) assuring to pay a certain agreed sum of money to the beneficiary in the event the insured person dies. The terms of the deal are usually indicated in a special document called the ‘policy document’. Among the information contained in the policy document includes the life insurance riders for which the insured has been covered and the monthly payments (Premiums) in order for the policy to remain active.

Are there Any Life Insurance Riders?

Yes, there are! Life insurance riders are those events which would result in the death of the insured person. But because there are numerous potential causes of death, the insurance company usually only accepts certain specific riders to be part of the policy. And they’re always clearly stated in the policy document. So, this means that the beneficiary shall only be compensated if the death resulted from any of the included riders. Below are some examples of life insurance riders, let’s have a quick look!

  • The Accelerated-Death-Benefit rider – which is applicable if the insured is diagnosed with a terminal illness.
  • The Accidental-Death-Benefit rider – which provides the life insurance covers for accidental deaths.
  • The Disability-Income rider – which ensures you get monthly payments should the policyholder become disabled.

There are many riders, and it’s extremely important to note that not all insurers have the same or all the riders. The availability varies from one life insurance provider to another.

Why life insurance is not a contract of indemnity?

This is one of the most important concepts to understand. Failing to properly understand why life insurance is not a contract of indemnity may result in later disagreements between you and your life insurance provider. Unlike most other types of insurance covers, life insurance lacks indemnity.

Not being a contract of indemnity means that a life insurance cover doesn’t promise to pay for the death, but just to compensate up to a certain level. In simple terms, death can never be fully compensated in terms of money – no given amount can ever possibly pay for death.  Now you know why life insurance is not a contract of indemnity.

How Life Insurance Works

Like other forms of insurance, there’s a period after which a given cover expires. This period is what we call the maturity period. So, the policyholder has to pay the monthly premiums regularly for the policy to remain active. Almost all providers allow you to select your most preferred payment plan. You can decide to pay monthly, semi-annually, or even annually depending on your financial capabilities.

The life insurance policy coverage doesn’t become active immediately after signing the agreement and paying your first premium. There’s usually a waiting period, mostly 3 months as with many insurers. Therefore, it’s important to note that the beneficiary can only get compensated after the given grace period.

And if by bad luck, the insured dies before the end of the grace period, all the premiums that shall have been paid will account to nothing.

Types of Life Insurance

There are three main types of insurance. But just before jumping in, you must never forget that not all life insurance companies provide all of them at once. What is available varies from one company to another. So, your job is to work around until you find the provider that is offering what you are after. Here are the types of life insurance available on the market today.

  1. Term Life Insurance – is a type of life insurance that covers the insured for a specific (limited) period as stated in the agreement. The cover expires at the end of the given period and the policyholder will have to renew if he or she wants the insured to continue being covered.

 

  1. Group (Wholesale) Insurance – This is a type of life insurance which covers more than one individual at a go. As the name suggests, it covers groups of people like the employees in an organization or members of a given SACCO among others. All the underwriting processes, in this case, are always done on the group and never on particular individuals.

 

  1. Permanent Life Insurance – It’s is the widest type of all. You pay your premiums until you die then your beneficiaries get compensated in the form of the death benefit. It’s a good option since it allows savings and borrowings. There are up to three sub-types of permanent life insurance, and here are they: 
  • Whole life
  • Variable &
  • Universal

What is the Role of Life Insurance Agents or Brokers?

Life insurance agents or brokers are the business intermediaries between potential clients and the insurer. They explain the various plans that an insurer offers and in many cases, the brokers go the extra mile and advice clients on the premium plans that best fit their financial capabilities.

In many cases, it’s the agents who help the policyholders in following up for compensations. In order for the payments to be released to the beneficiary, the policyholder must provide the policy document as well as the burial permit. Finally, it’s important to note that an individual may be both the policyholder and the beneficiary.

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