The Big Picture: Life Insurance Explained

The Big Picture: Life Insurance Explained
By Dr. Napat Jatusripitak

To many, the topic of life insurance can seem intimidating and perhaps overwhelming. With the many choices and options, it is understandable why people might find selecting life insurance a complicated task.

In reality, life insurance is not as confusing as it may seem. In fact, the overarching principles are actually very similar to other types of insurance that you may be more familiar with.

So what exactly is life insurance and why should you consider it?

In its simplest term, life insurance is an agreement between an individual and a life insurance company. The individual pays small amount of money monthly or yearly. And the company agrees to pay a large sum of money to the insurer’s designated recipient should the insurer pass away. If the insurer lives a risky life (pay out might happen sooner due a fatal accident etc.) or if the insurer would like the pay out to be larger in amount, the premium the insurer pays will also typically be greater.

It is very similar to health insurance or car insurance where you pay a small amount of money periodically (which is dependent on your health or driving records) to guarantee that should a more expensive medical cost were to incur or if you were to get into an auto accident, you wouldn’t have to pay the full amount.

How is life insurance different than other types of insurance?

The person who purchases life insurance and pays for it isn’t the person who reaps the benefit directly.

So the biggest reason people purchase life insurance is that they want their loved ones to be taken care of financially when they are gone.

Looking at life insurance through an economics lens

By paying small amounts of money over your life span, you are purchasing a guarantee that your loved ones’ quality of life will not drastically change should you pass away and can no longer bring in income for the family.

Keep in mind though that there are many types of life insurance and the details of the agreement can vary. In fact, some life insurance agreements will pay out after a certain amount of time regardless of whether the insurer is still alive or not and some allow the insurer to add-on a savings option as well.

When you select your life insurance, keep in mind the general principles as outlined in this article to help guide you to choose what is right for you and your family.

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