Life Insurance

Life insurance is a financial product that provides a monetary benefit to beneficiaries upon the death of the insured individual. It serves as a safety net, ensuring that dependents or family members are financially supported after the loss of a primary income earner.

Types of Life Insurance

There are two main types of life insurance:

Term Life Insurance

Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. If the insured passes away during the term, the beneficiaries receive the death benefit. If the term expires and the insured is still alive, no benefit is paid.

Whole Life Insurance

Whole life insurance offers coverage for the entire lifetime of the insured, as long as premiums are paid. This type of insurance also has a cash value component, which grows over time and can be borrowed against or withdrawn.

How Life Insurance Works

– The insured pays regular premiums to the insurance company.
– In exchange, the insurer guarantees a death benefit to the beneficiaries.
– Premium amounts may vary based on the insured’s age, health, lifestyle, and the type of policy chosen.

Example of Life Insurance

Consider a 35-year-old male who purchases a 20-year term life insurance policy with a death benefit of $500,000. He pays an annual premium of $350.

If he passes away within the 20-year term, his beneficiaries would receive $500,000. However, if he survives the term, he does not receive any benefit, and the policy simply expires.

Calculation of Premiums

Insurance premiums can depend on various factors, and while the exact calculations require detailed underwriting, a basic formula some insurers use is:

• Premium = Base Rate + (Age Factor × Age) + (Health Factor × Health Risk) + (Coverage Amount Factor × Desired Coverage Amount)

For example, suppose the base rate is $200, the age factor is $5 per year, the health factor adds $50 for health concerns, and the coverage amount factor is $0.50 per $1,000 of coverage:

• Base Rate: $200
• Age Factor for 35 years: $5 × 35 = $175
• Health Factor: $50
• Coverage Amount Factor for $500,000: $0.50 × 500 = $250

Adding these factors together:
Premium = $200 + $175 + $50 + $250 = $675

In this simplified example, the annual premium would be $675, though in practice, the individual’s actual premium may differ based on additional underwriting details and risk assessments.

Life insurance is essential for protecting the financial future of loved ones, especially in families with dependents or significant debts.