Insurance is a contract between the insurer and the insured. The insured agrees to pay a premium or a certain amount to the insurer or the insurance companies. In return, the insurer will pay the insured once the risk insured against occurs. The risk insured against are the risks listed in the insurance policy in which the insurer agrees to pay if any of those risks happen.
This sounds like gambling to some people because it involves putting down an amount and getting paid when something happens. An insurance contract is far from gambling although there may be certain similarities between the two. Insurance contracts involve a scheme to distribute losses among a large group of people having the same risks. The risk of loss is distributed among the people who have taken insurance contracts with the insured.
People can insure their property and lives as well. Before insurance companies help you get insurance contracts, they need to determine if one has an insurable interest over the property. This means that the person will stand to lose something if the property is lost and stand to gain something if the thing is with that person. Insurable interest is related to the pecuniary estimate of a property. Although insurance contracts need a pecuniary estimate of the property, a human life is not capable of pecuniary estimation. But it is sure that one has insurable interest over one’s self.
A life insurance is not a contract of indemnity. Thus, depending on the type of insurance policy you got for yourself, the proceeds of the insurance will vary. For many people, life insurance is something that will give them economic benefits while they are still alive or it could give all those benefits to their beneficiaries once the insured is dead.
There are two types of life insurance, first is the permanent insurance. This insurance is insurance on one’s life and it operates until one dies or stops paying the premiums. The second is the term life ins. From its wordings alone, you will immediately understand that the term life ins is for a certain term only unless if the insured opts to continue his/her plan. Insurance companies use different combinations of the three elements of a term life insurance. These companies could change the term, the cost and the protection. Another interesting aspect of the term life ins is that it does not accumulate cash value.
For example, Mr. X took out a term insurance for a term of one year. After the fourteenth month he met an accident and died. His beneficiaries cannot claim the proceeds of the insurance because the term had already expired. His beneficiaries get nothing despite Mr. X paying his insurance premiums on time because the insurance is already inoperative. Thus, because of this, it has become common to put a clause that the insurance does not cover suicide. However, there are court rulings that would allow beneficiaries to get the insurance proceeds despite the suicide of the insured.
But if Mr. X opted to continue his insurance, then his beneficiaries are still entitled to the insurance proceeds. Usually, term life insurance contracts last for about a year and insurance holders have the option to continue their insurance coverage, this is called a renewable term. The “catch” of this renewable term is that, premiums are bound to increase when the insurance contract is renewed. As compared to the permanent life insurance, the term life insurance is relatively inexpensive.
Why term life ins relatively cheaper compared to the permanent life insurance? It is because the premium is based on the probability of the person dying at that particular year which is usually quite low. Insurance companies assess this person for risks like his current health, his lifestyle, hobbies and interests. Take note that just because the term insurance is renewable, it doesn’t mean that the insurance company will automatically renew your contract or continue your contract because you still need to prove to them of your insurability.
Make sure that you get a guaranteed re-insurability clause in your insurance contract. Or you could scout for insurance companies that offer the annual renewable term (ART). This means that current premium will remain the same for the next few years as stated in the contract. Because of this, expect your premium to be higher. The premium of this kind of contract is higher because the insurance company is obligated not to increase the amount of the premium as time goes by. The duration of these agreements can be controlling for the next ten to thirty years.
Term life ins is cheap and it will give you the flexibility that you need especially if you want to be safe with yourself and your finances but are not sure of the kind of permanent insurance that you want to take for yourself.