Monday, September 24, 2007

Importance of Insurance for Parents

Life Insurance ! in a simple defination it can be described in short as 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.

Though Life insurance itself is a broader spectrum we would try to limit the boundaries on the importance of life insurance on parents.

We must be a responsible person for our parent’s non-working life. In today’s technology driven world, the average life of a person is becoming greater each day. And more importantly, the medical field is getting expensive beyond control. Generally, your parents’ ability to take care of themselves go down as they move up in their lives. Inability can be physical as well as financial or in many cases both of the above given cases. And here is where you are responsible towards their care taking in financial terms and physical terms – to the extent possible. Insurance will help you take care of the future, in present, if planned well.

Getting Covered

Now that we know we need it, what are the life insurance options and how much should we buy?

Basically there are two types of life insurance policies available: term and cash-value.

Term – Term life insurance is the simplest type of life insurance. With term life insurance, you pay a premium (usually yearly or monthly) over a set period (for example, 10, 20 or 30 years). With some policies (“increasing term”), the premium goes up over the term of the policy; with others (“level term”), the premium remains the same over the term of the policy. In return, if you die before the term of the policy is up, the insurance company will pay your beneficiaries a set sum of money (the “face value” of the policy). When the time period (term) of the policy ends, your payments (as well as the coverage) ends, unless you choose to renew it.

Term policies can be further divided into two main types:

Level term life insurance, in which both the premium and the death benefit on the policy remains the same throughout the term of the policy.

Decreasing (or declining) term insurance, in which the premium remains the same, but the death benefit gradually declines over the life of the policy. Mortgage life insurance is usually a declining term policy. And, because the death benefit declines and the death benefits often must be used for a specific purpose – that is, to pay off a remaining balance on a mortgage or other loan – declining term life insurance is virtually never a good buy.

Cash-Value – Cash-value life insurance policies combine life insurance with a savings or investment element. As with term insurance, you pay regular premiums on the policy, and, if you die while the policy is in effect, the insurance company will pay your beneficiaries a set sum of money. Unlike term insurance, cash-value policies remain in effect for most or all of your life, and, in some cases, after a period of years, you can stop paying premiums on the policy (even though the policy remains in effect). Generally, there are three types of cash-value policies:

• Whole life insurance, in which premiums generally remain the same over the term of the policy. A portion of the premium pays for your insurance, while a portion is put into a “savings account” (the “cash value” of the policy). How much interest that is paid on this cash value does not have to be disclosed by the insurance company. Moreover, the only way to access this cash value is to borrow against it or cancel the policy.

• Universal life insurance, which is very similar to whole life insurance. However, with universal life policies, the amount of your premium going toward savings, and how much interest is being paid on those savings, is disclosed to a larger (but not complete) degree. In addition, because of the numerous fees and expenses that are charged on universal and whole life policies, the actual cash value of the policy (as well as its rate of growth) is often much less than it seems.

• Variable life insurance is virtually the same as universal life policies, with one major exception. With universal, the insurance company chooses where to invest the “cash value” of policyholders’ accounts; with variable life, you get to choose from a number of investment vehicles (usually a mixture of mutual funds, bonds, stocks and money market funds) and, therefore, the degree of risk that the investment (or savings) portion of your policy takes.

I hope these discussions should have started a stream of questions in you , so what are you waiting for lets get started by buying life insurance for parents.

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