Personal FInance

Life Insurance Explained

Life insurance is a necessity today especially for those people whose families financially rely on them. There are several advantages of getting a life insurance. Yet, despite these benefits, a lot of people still don’t recognize the importance of life insurance. One of the reasons for this is the complexity of life insurance to most of the people. Hence, if you are one of those people who are not yet familiar with what life insurance is, you are in the right place. This article will provide you with the basic yet essential thing that you should know about life insurance.

Insurance: Definition

Basically, life insurance is a contract, which is also known as a policy that binds an insurer or insurance company and a policyholder or also known as the owner of the insurance. This contract guarantees payment of a death benefit from the side of the insurance firm to the named beneficiaries upon the death of the insured. Consequently, the insurer promises death benefits in consideration of the premium payment by the owner or policyholder.

Insurance: Purpose

Generally, the main goal of life insurance is to give financial protection in order for the beneficiaries or dependents to survive after the insured passed on. As such, it is very important for people who like to get a life insurance to carefully analyze the situation of their finances and wisely identify and consider the living foundation and standard needed for their left dependents before availing a life insurance policy.

Components of Life insurance

There are 3 main components of life insurance: death benefit, premium and cash value. Death benefits refer to the amount of money that the insurer promises to the beneficiaries stated in the contract upon the death of the insured. But before determining the benefit, the insurance company normally evaluates insurable interest first. Premium refers to the set payments that are based in research and studies. The insurer will classify the overall cost of the insurance, the required amount to aide and cater the costs of mortality, policy maintenance and administrative fees. Lastly, cash value of both the universal and permanent is considered as a part that acts as savings account and offset rising cost.

Riders of life insurance

Moreover, there are also some life insurance riders that owners have the option to customize. In simple explanation, riders serve as modifier for policyholders towards their plan. Some of the most common riders are waiver of premium rider, disability income rider, accidental death benefit rider, accelerated death benefit rider, critical illness cover rider and so many more.

Most of these riders are necessary and very helpful most especially when the policyholder doesn’t have a stable health condition. But in general, riders are designed to add additional protection and security to policyholders. Hence, the owners of the policy have the freedom to choose to avail or not the riders.

There are also some negative aspects of life insurance such as opportunity cost. However, according to studies, life insurance serves only good things to clients. It only takes away the risk of having financial problems for the family of an insured person. Insurance is also not an investment tool. It is a risk management tool that allow people to have worry and stress free life. After all, your family’s future should always be the number one priority.


Paola Garcia lives in Jakarta Indonesia. She is an associate professor in University of Indonesia and also managing Scoopinion at the same time. She is also fond of watching theatrical plays.
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