Do you have enough life insurance? Better yet, do you even know what life insurance is? And the most important question, do you have enough life insurance?

In our attempt to save for retirement, pay for college and get that next house, we tend to forget about life insurance. The vast majority of people who work for at least a medium size company usually gets some kind of life insurance from the company as part of their employment further reducing the chance that we think about it as part of our financial future. However, have you asked if yourself if you really know what life insurance is, what it is supposed to do and they different types of insurance available?

What is life insurance?

Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the policy owner’s death. In return, the policy owner (or policy payer) agrees to pay a stipulated amount called a premium at regular intervals.

As with most insurance polices, life assurance is a contract between the insurer and the policy owner (policyholder) whereby a benefit is paid to the designated Beneficiary (or Beneficiaries) if an insured event occurs which is covered by the policy. To be a life policy the insured event must be based upon life (or lives) of the people named in the policy.

Insured events that may be covered include:

• death
• accidental death

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil commotion.

Life based contracts tend to fall into two major categories:

• Protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment.
• Investment policies - where the main objective is to facilitate the growth of capital by regular or single premiums.

Capital growth or protection?

My personal feeling is that life insurance is not the best investment vehicle for your money. There are far more lucrative options out there such as mutual funds, Certificates of Deposit, index funds and so on. That means I’m a proponent of life insurance for protection. Why? The primary reason is there are better places to put my money, as mentioned above.

In any event, over the course of the month I’ll cover different aspects of life insurance, from the different types, how it is transacted, etc. More to come…

insurance, Personal Finance