How does life insurance work?

Life insurance guarantees the financial security of our family and dependents in case we are no longer here. Check out everything you need to know about how it works.

The concept of life insurance is very simple: financial protection. Still, it is natural that some doubts arise. After all, do you know what this service provides, who can benefit, and if it is worth having one? 

We created this complete content on the subject, precisely to show you everything you need to know about life insurance in a simple and didactic way. 

Next, in addition to giving you some tips to help you understand if you really need such insurance, we explain:

  • what is life insurance;
  • what is it for;
  • how it works;
  • what types are available.

So let’s go!

What is life insurance?

First, we need to point out that there are different types of insurance, each one protecting a type of asset against a certain event. In the case of life insurance, the “good” protected is life itself, and the event in question would be the death of the holder. 

They work through a contract with an insurance company and aim to provide financial security to one or more beneficiaries. In other words, it is a way of guaranteeing financial resources for dependents in case the holder is no longer present.

This financial protection occurs through the payment of an indemnity, the total amount of which is decided by the insured. If he dies, compensation is paid to the beneficiaries within a period of time.

The cost of insurance varies according to the indemnity, coverage and particularities of each insurer. Therefore, it is important to keep in mind what the general conditions of insurance are before actually taking out one.

 

What is it for?

The idea of ​​protecting beneficiaries means giving financial support to the dependents of the person who has taken out the insurance. At this delicate moment, it is possible that someone close to you is not prepared to continue dealing with expenses.

Those who have small children, for example, know that a common concern is investing in education. Leaving them helpless is simply not a possibility. The objective, then, is to ensure that the little ones can follow their school trajectory as planned, even if an unforeseen event occurs.

As they get older, you still have to think about college. At this point, life insurance can be decisive for the professional training of children, structuring their careers or even helping to open a business.

In practice, insurance serves to bring tranquility so that we can experience the good moments of life. In the event of an unforeseen event, those closest to you will be protected against financial difficulties and will be able to maintain their standard of living.

How does it work?

The first step is to know some specific terms of life insurance. Three you are sure to find are:

  • holder — the insurance contractor;
  • beneficiary(ies) — one or more persons indicated by the holder to receive the insurance amount;
  • insurance policy — a document that contains all the agreement information, such as usage and coverage rules.

With that in mind, here are some important insurance steps.

Hiring

Initially, it is essential to know more about the type of product that is offered. You must know all the information about coverage, payment methods, insurance activation, and general conditions, among others. Some insurances include, for example, funeral assistance, in order to simplify this process.

What types of life insurance?

There are different types of life insurance and we know this might come as a surprise to some people. Therefore, if you decide to hire yours, we suggest that you know the differences between them to find the most suitable option. See the three most common types below.

temporary life insurance

This is the simplest type, and fits the characteristics listed above: the period of validity and the value of the insured capital are predetermined. In other words, you know how long the contract is and how much it will be paid for. 

Also know that, although temporary, it can be renewed on some occasions.

Redeemable life insurance

This is a model that provides for the possibility of redeeming a portion of the insurance money after a certain period. Here, two warnings are worth it: this type of insurance usually has a much higher value and, the worst, the redemption value is low compared to other investments. 

 

Group life insurance

Group insurance, on the other hand, is usually contracted by companies or other organizations to cover a group of people. The tip for entrepreneurs is to compare the conditions before closing the contract to ensure the best conditions for their employees. 

Although they do not need to contribute directly, policyholders of this type of insurance face some disadvantages, such as, example, the impossibility of choosing the amount of the insured capital.

It is worth it?

Now that you know how life insurance works in every detail, the question remains: is it worth taking out? We help you answer.

Start by considering the following question: do you have people who depend on your financial income for a living? If the answer is yes, it is almost certain that insurance is an important ally for you to have more peace of mind.

A second point is to assess your financial reserve. Those who have a large volume of resources at their disposal — or even a large company — may not necessarily need life insurance to guarantee the well-being of their loved ones.

In this case, it tends to be more interesting to have insurance against disability or serious illness. It is worth thinking about these two aspects and, if you decide on insurance, look for a transparent, reliable insurer with good contracting conditions.

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