Thursday, 28 February 2013

Life Insurance – Know about the Risk Involved

The general perception about life insurance is that it is a risk-free model for the policy holders. This conception arises out of the fact that through insurance of your life, you transfer the financial risk to the insurer in the event of your demise before the completion of term. However in some cases, the risk may give a blow to you instead of the insurer. That probability makes it important that you learn the risks that are common to all life insurance policies.

Life Insurance – Know about the Risk Involved

Experience of Mortality

In universal life insurance, there is a clear distinction between mortality function and investment function of a certain plan. It implies that you are not charged for the guaranteed cost of the particular policy; instead a forward-looking approach to cost is adopted by the insurance company. This working method is based on a presumption that the guaranteed cost will be more than the real cost. If the company is a genuine one and reputed for its fair dealing, you have to pay only for the calculated cost. But if the company is used to shoddy business practice, you will end up paying higher cost for insurance. You may think about terminating the life insurance plan if you find it hard to afford high premium for a longer time span.

Experience of Investment

In case of fixed policies, universal life insurance comes with assumed interest rate. This rate refers to the lowest interest charge that must accrue to the cash-value account of the policy holders. The assumed interest rate covers expected profit and cost incurred by the insurer. This rate is of dynamic nature and varies in respect to market condition. The life insurance company expects a positive investment experience. If that happens in reality, the assumed interest rate will be credited to your policy. But in the event of incorrect assumption, you will get less than assumed interest rate. Complication arises if the insurer feels that actual mortality charge will be lower than the estimated margin. You will not gain much if interest accumulating on your policy is not sufficient to cover the insurance cost. As a result, you may end up paying for additional premium to keep hold of the policy or may seek to lower death benefits that come with the insurance plan.

Payment for Premium

Every policy owner is obliged to meet on-time premium payment for a long period of time to retain life insurance policy. Excluding the case of one-year and five-year policies, the premium period extends over 10 years. In case of permanent plan, premium is to be paid for more than 50 years. If premium is not paid in time, the policy may lapse and there will be great loss of coverage on your part.

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