Life Insurance and Disability Insurance Explained


insuranceWhen it comes to life insurance, many people are confused between the options of Term Life Insurance and Whole Life Insurance, and the same is often true between Disability Insurance and Long Term Care Insurance. Here is an explanation of what these various terms refer to, and how they may affect you and the type of insurance you decide to purchase.

Life Insurance

As the term suggests, life insurance is paid out on your death. Most people take sufficient life insurance to cover the expenses of their funeral, and if they also have dependants such as a partner and children, it would normally also give them some degree of financial security - on a permanent or temporary basis.

The amount charged for your life insurance will depend on a number of factors, the major of these being the amount of the insurance and the term over which it is taken. However, another major factor is your health. It is of critical importance that you declare any health problems you may have currently or have had in the past, because the insurer will check up carefully on each of your statements.

There are two specific types of life insurance: term and whole life.

Whole Life Insurance

Whole life insurance covers you for the rest of your life, and accumulates cash value over time. This cash value is not the same as the more expensive endowment life insurance policy that involves a combination of term life insurance (discussed below) and fixed period investment that pays you a sum of money at the end of the term.

The benefit from whole life insurance is that you are covered for life, though a cash value can be paid should you cancel your insurance. The cash value reaches a maximum of the amount insured at a certain age, generally 100 years old in the USA, although only the sum assured is paid on death.

Whole life insurance is generally more expensive than term insurance:

Term Life Insurance

If you are young and unable to afford whole life insurance, you can purchase term life insurance that covers you for a specific period, such as 5 years, 10 years or even 20 years. There is no cash value, and nothing is paid if you fail to maintain payments. Once the term has passed, your insurance is cancelled and you receive nothing. This is the most affordable form of life insurance.

The premium for term life insurance can increase, and some are renewable annually at increased premium prices to keep up with inflation. Whole life insurance premiums are maintained at a level rate for the lifetime of the insured. Flight insurance is an extreme form of term life insurance, lasting for the period of the flight only.

Disability Insurance

Disability can be disastrous to a family: You are unable to work and earn money, yet your living expenses generally increase and you also may have massive medical care expenses. Disability insurance helps to make sure that you are financially secure in the event of unexpected disability.

Prior to taking out disability insurance you should first make sure that you understand what your insurer defines as 'disability'. Some define it as being unable to carry out any job at all, so you are not paid if you can work sitting down in an office rather than carrying out your normal job as an engineer. Other insurance companies will accept 'disability' as being an inability for you to carry out your normal work.

You should also consider the term over which the disability insurance is paid: until retirement date? For a shorter period? Insist on the former! You should also check whether or not your insurance payout is reduced according to any social security payouts. That means it will be reduced if you receive any other income, and will not rise with the cost of living.

So life insurance and disability insurance may not be not as simple as you believed them to be, and you are advised to take the advice of a financial advisor prior to buying any form of the above insurance policies.


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