Definition and explanation:
Life insurance is basically the insurance of the person who has joined the insurance company i.e., policy holder.
When a person becomes a policy holder for the insurance company and selects the category of life insurance then it means that if he dies uncertainly by some natural disaster or accident etc then the company in return will provide a lot of funds to his family and will help him in every matter. The company will cooperate with his family in return. In this way the term life insurance can be defined.
The policy holder has to submit a certain amount of money to the company after a certain time period. But according to the agreement done with the policy holder the company gives several benefits to the family of the policy holder after his death. This is a very useful way to join insurance company and it is very common process in the developing countries. After the death of policy holder when there is no one to help his family then the insurance company helps his family in every matter and grants funds. Now the question rises that why most of the people select the category of life insurance. There are several reasons behind this question. Some of them are discussed below:
1: Family protection:-
A large and basic reason is the family protection. The answer of the above question lies almost in this reason. About 80% of the people join life insurance due to the protection of their family. In developing countries the people are poor and they know that there is no one behind to support their family after the death. They know that no one will provide financial support to their family behind them. In this situation they join the life insurance in an insurance company. In this way the policy holder need not to worry about his family after his death because the insurance company has already done the agreement with him to provide every kind of financial support to his family. In this way the insurance company looks after the insurer family after his death.
2: To cover a particular need:-
Another main reason to purchase the life insurance policy is to cover a particular need.
When a policy holder has to give back some loan to a person or company and if he is unable to return it in his life then he does an agreement with the company and purchase life insurance from an insurance company. When he dies uncertainly by some natural disaster or accident etc then the insurance company has the responsibility to return the loan taken by him. The insurance company returns all the loan in place of the policy holder. So we can say that the life insurance is very useful term.
3: Provide funds:-
Another reason for choosing life insurance is to provide funds to the policy holder. When he wants to leave the insurance company the company in return grants him several funds and if he had died then the company also gives funds and money to his family too.
Life insurance an asset:-
Life insurance can also be called as an asset because it is like an asset for the policy holder as well as the insurance company. Due to this reason it contains a lot of advantages. Some of these advantages are given below:-
1- life insurance is a very secure asset.
2- life insurance is a policy that is very cheap and one can purchase it in a very little amount.
3- the life insurance policy gives a reasonable amount of money on return.
4- in this policy the proceeds are also payable immediately.
5- another advantage of this policy is that the owner of this policy can choose his/her method of premium payment. There are several methods of premium payments for the policy holder and he can choose one depending on his condition. We will discuss them in detail later.
6- the policy holder needs not to worry for the managing of this policy and also its payments.
Estimating life insurance need:
There are several methods and rules for estimating life insurance needs for a policy holder. Here we are discussing two rules. These are :-
This rule states that “insured’s
insurance need would be equal to 6 or 8 times his/her gross annual income.”
Income plus expense rule:-
This rule states that “insured’s insurance needs would be
equal to 5 times his/her gross annual income plus the total of any mortgage, personal
debt, final expenses, and special funding needs.”