So, what is life insurance anyways? Technically speaking, life insurance is a legal contract between a carrier or the life insurance company and the policy holder which provides a specific sum of cash benefit to the beneficiary upon the death of the insured person while the contract is still in force. Some life insurance products also provide cash benefits in case the policy holder contracts a terminal illness. On the face of it, it looks very simple, but a lot needs to be understood about various aspects of life insurance. The ultimate goal is to provide a financial safety net to the people who are financially dependent on you should something happen to you.

Why Life Insurance?

Though most of us may not agree to it, but we are subjected to varied degrees of life risks on day-to-day basis. Something as innocuous as a drive to a grocery store may lead to a car crash resulting in serious injuries or even death. Thus, if something happens to you, people who are financially dependent on you would be left to fend for themselves. For instance, if you are married and have children and you were the only breadwinner of the family, in your absence their life would turn topsy-turvy. Things could get worse if you have a mortgage on your newly purchased home or some other form of debt. Your spouse along with your children will be evicted out of the house. Life insurance can also be used for leaving behind a charitable legacy or to protect interests of a business in which you may have a significant role.

Before You Buy Life Insurance

Buying a life insurance policy though is easy; the amount of information and technicalities associated with them might confuse you. The problem is compounded when you have to decide what type of insurance policy you need to buy. Information provided below will come in handy.
Life insurance products are broadly divided into two categories, which are –

Protection Policy:

This is the purest form of life insurance wherein the beneficiary is paid a lump sum in case the insured person dies while the policy is valid.

Investment Policy:

Though the primary goal is to provide life coverage, the amount paid to the insurance company in the form of premiums is also utilized for investment purposes by the carrier.
Before buying, decide what type of life insurance product you want to buy. If life coverage is your sole purpose, protection policy is recommended. If you also want to make investments, then an investment policy would be good choice. However, be informed that investment policies have higher charges associated with them.
Life insurance products are further classified as follows –

What is Term life insurance?

This type of life insurance coverage allows for temporary life insurance needs to be fulfilled. It provides the needed protection but only for a predefined length of time which is the ‘term’. Term life insurance is not meant to have cash value. You pay a premium every year of the term and the premium covers you in the event of your death in that year. The only way to collect on a term life insurance is if the insured person were to die before the expiration of the term life insurance policy.

The death benefit is received by the policy beneficiary if the insured person dies and this amount is remitted completely free of income tax.
Term life insurance is a good idea for those who have a home mortgage or are paying a child’s tuition fees as these expenses will decrease over time.

What is Whole Life Insurance?

Whole or permanent life insurance is a lifelong protection policy that stays in force as long as the premiums are paid. It has cash value as the accumulated premiums add toward savings through the policy.

Other types include insurances policies pertaining to child life, accidental death, disability, final expense, no medical exam, long term care, critical illness and life insurance riders. A qualified financial advisor will explain to you the intricacies and benefits of these life insurance policies.

How Much Life Insurance Do You Need?

There are several factors you need to consider before you answer this question. Following factors play a crucial role in calculating the required insurance amount –
Age: In general, the younger the person is the higher is the life insurance need. Young people have more productive years to go before eventual retirement and have a higher earning potential too.

Annual Income: Your annual income determines your standard of living as well as that of your family. Most analysts and experts recommend getting a life insurance policy that is roughly equivalent to ten to twenty times your annual income.

Number of years for which the benefits are needed: When your annual income is deducted from the family expenditure, an annual shortfall will be experienced which can be balanced out by the number of years you need the benefits for. Your life insurance amount will cover expenses or compensate for the shortfall till the situation changes, for example, till your children graduate.
Other factors that are considered are estimates of the annual inflation rates and the annual rate of interest.

While these factors are important, you need to ask yourself how much money will your family need to cover your final expenses as well as do important things like pay off mortgage, pay for tuition and continue to live at a decent standard of living? The answer to this question should give you a rough estimate of how much life insurance you will need.

Finalizing a Beneficiary

The beneficiary of your life insurance policy will be the one who receives the death benefit after you die. This is a decision that you need to think about carefully. In most cases, beneficiaries listed happen to be members of the family but there is no rule that it has to be this way. You can name anyone as your death benefit beneficiary.

It is a sensible practice to name a second beneficiary or a contingent beneficiary who stands to receive the death benefit if the primary beneficiary dies before you or at simultaneously. For example, if you have named your spouse as the primary beneficiary, you can make provision to name one of your children as contingent beneficiary in the event that your spouse expires before you or at the same time as you, like in case of an accident.

Two possible pitfalls occur when an insured person names a minor as a beneficiary as a legal guardian will have to be appointed by the court to oversee the money while the minor attains the age of majority.

In some situations, an estate is names as the beneficiary. Experience shows that this results in plenty of delays, legal debates, debts, taxes and other probate problems.

While naming your beneficiary/beneficiaries, it is best to be as precise as possible. Provide names, relationships as well as their pertinent information like social security numbers, if possible.

Specifying Division of Benefit Amount

It is also possible to name more than one person as primary beneficiary. In this case, you must specify the division of the death benefit amount as well as their names and relationships that you share with them.

When specifying how the amount has to be divided, specify in percentages as monetary sums or dollar amounts tend to become outdated as time passes. If you are unsure as to how to proceed with this, you may want to consult with an accountant, your estate planner or even your lawyer.

Your beneficiary is the person who will gain the most in the event of your death. This is a choice that commands plenty of thought and discretion.

How to File a Claim?

If you have been names a beneficiary in a life insurance policy and have to collect the death benefit, there are a few things that you will need to keep in mind. The basic purpose of a life insurance policy is to give the beneficiary instant financial support when the insured person dies.

This is how you can go about filing a life insurance claim:
1. Speak with the insurance company representative or your insurance broker directly. You will be told what forms need to be ready in order to file a claim.
2. Certified true copies of a number of certificates like the death certificate will be needed. For every life insurance policy death benefit claim, one set of all the necessary documentation will have to be provided.
3. Once the claim is submitted and verified, the settlement should be on its way in no time. There are a variety of options pertaining to how you can receive this money. If the insured person has not made this decision for you prior to their demise, you can choose to receive the amount in a lump sum payment or choose to let it be deposited in a bank account on your name, accruing interest till you choose to make a withdrawal. There are many other options you can speak to the life insurance company about.

Though the internet is an excellent source of information, buying an insurance policy blindly is not recommended. Always consult a qualified financial advisor before a purchase is made so that you buy what you need and not what the company wants to sell. Now that you know “What is Life Insurance?” hopefully you will be able to make the best decision for you and your beneficiaries. Good luck!