The following article is about What Is Life Insurance? Life Insurance Types And 5 Important Principles.
As the need for protection and health issues become increasingly important, life insurance is no longer a strange term for everyone. To understand what life insurance is and its significance in reality, please read the following article.
1/ What is life insurance?
Life insurance is a product provided by insurance companies to protect customers’ financial interests against risks related to the body, health, and life. In addition to information about the policyholder or the insurer, the life insurance policy clearly defines the benefits that customers receive. After the contract is signed, customers will pay insurance premiums either once or regularly into a financial reserve managed by the insurance company. If there are no risks occurring by the end of the contract, the insurance company will pay the accumulated premiums plus interest. Conversely, when encountering “insured events” as mentioned in the contract agreement, customers will receive payment or compensation as committed by the insurance company.
2/ What is the significance of life insurance?
Purchasing life insurance not only serves as a means of ensuring financial security but also holds various other meanings.
a.Preventing risks and protecting finances: Humans cannot control everything that happens in life. Therefore, if unfortunate events occur, such as accidents or death, the insurance company will support customers in financial matters. The financial assistance from insurance payouts can help alleviate the financial burden for customers and their families, enabling them to quickly recover from losses and regain confidence in life. Furthermore, life insurance acts as a healthcare access card. Insurance participants can seek medical treatment at premium healthcare facilities, access new treatment methods, and enhance their recovery capabilities with a team of highly skilled doctors, without worrying about financial matters.
b. Serving as a form of savings for the future: Regularly paying life insurance premiums will help customers develop a more disciplined saving habit. After the insurance policy matures, the amount received can serve as accumulated funds for future plans, such as investments, travel, or funding a child’s education abroad. Moreover, if customers participate in life insurance at a young age, this money will ensure a peaceful and independent life for them in their old age, without relying too much on others.
c. Sharing misfortunes – People for one another: In addition to protecting the lives of insurance participants against risks, life insurance operates on the principle of “the many support the few.” This means that when people participate in life insurance, the premiums will be pooled into a common fund for investment and profit generation. When someone encounters unfortunate events, life insurance will allocate a portion of the risk fund to compensate for those less fortunate customers. This is a way of sharing risks within the community.
See more: 7 Tips For Choosing The Best Air Fryer
3/ What are the principles of life insurance?
These principles provide the foundation for how life insurance operates and ensures that it fulfills its intended purpose of protecting individuals and their financial interests.
a. Principle of honesty:
As life insurance is a product related to the body and life of individuals, insurance providers have strict requirements for the information provided by customers. It is essential to be absolutely honest when disclosing information about health conditions, medical history, etc. This forms the basis for the insurance company to evaluate the application and determine whether the customer is eligible for life insurance. Moreover, providing complete and accurate information when participating in insurance is a way to protect the rights of the contracting parties.
b. Principle of indemnity in life insurance:
According to the principle of indemnity, when insured events occur, the insurance company will refer to the insurance contract to determine the amount to be paid to the beneficiary according to the specified indemnity level. Therefore, policyholders can simultaneously enter into multiple insurance contracts with different amounts and have the right to receive insurance benefits from those contracts.
Note: The amount paid by the insurance company is not intended to compensate for damages but to fulfill the commitments in the contracted policy.
c. Principle of proximate cause:
The proximate cause is the dominant or strongest cause that leads to loss for the insured person. Life insurance only covers cases where the insured events occur unexpectedly, randomly, or unintentionally for the insured person, rather than insuring pre-existing or certain risks that have already occurred. Additionally, life insurance only pays for causes that fall within the insurance company’s defined responsibilities.
d. Principle of insurable interests:
According to Article 9, Clause 3 of the Insurance Business Law No. 24/2000/QH10, insurable interests are defined as ownership rights, possessory rights, use rights, property rights, and rights and obligations related to nurturing and supporting the insured person.
In life insurance, this is explained as follows: Insurable interests represent the relationship between the policyholder and the beneficiary, established based on marriage, blood ties, employment relationships, etc. Among these, the risks faced by the insured person will cause financial losses to the policyholder. Specifically:
- You have unlimited insurance benefits for your own life. Therefore, insurance benefits also exist for your father/mother, spouse, children, or individuals for whom you have legal responsibility to support or be their legal guardian.
- These insurance benefits also exist when the employer purchases life insurance for employees.
e. Principle of the many support the few in life insurance:
A portion of your insurance premium will be added to a reserve fund. This fund will use the money to share and compensate for the financial shortfalls experienced by unfortunate customers over the years. The remaining portion will be invested by the insurance company to generate profits and distribute dividends to you. This principle reflects the humanitarian and benevolent nature of life insurance.
You may also be interested in: 6 amazing facts about giraffes
4/ Life Insurance Types
There are various ways to classify life insurance, but here are the three most common classifications:
a. Life Insurance Types based on participation method
- Individual life insurance: This type of insurance involves individual policyholders. Within this type, the insured individual can purchase additional coverage for family members under the same policy.
- Group and family life insurance: This type of insurance is provided in a group format, with a list of individuals who are insured.
b. Life Insurance Types based on the scope of insurance
- Whole life insurance: With whole life insurance, the beneficiary receives the insurance payout upon the death of the insured.
- Term life insurance: This is insurance coverage for a specific period of time as agreed upon.
- Endowment life insurance: If an insured individual experiences an unfortunate event within the policy term, the insurance company will pay the full insurance amount to the beneficiary.
- Mixed life insurance: This combines features of both term life insurance and endowment life insurance.
- Regular premium life insurance: If the insured individual survives until a predetermined time as agreed upon, the insurance company is obligated to pay regular insurance benefits to the beneficiary according to the contract.
c. Life Insurance Types based on the purpose of purchasing insurance
- Protection insurance: This insurance product provides comprehensive protection to participants against potential risks that may lead to unfortunate events. Additionally, it offers financial support for healthcare and access to modern medical treatments.
- Investment-linked insurance: This type of insurance provides financial protection against risks while offering opportunities for wealth accumulation and asset growth through investment products in linked funds.
- Savings insurance: This insurance product includes profit-sharing participation, where the premium payments are accumulated in a fund. It serves as a financial reserve for participants.
- Retirement insurance: This insurance product is designed to protect the rights and benefits of workers when they reach retirement age.
- Education insurance: This insurance product is specifically designed for children. It aims to meet their accumulation needs and provide a solid foundation for their future.
5/ Which best life insurance should you buy?
The life insurance market in the US is quite diverse. However, the products offered by insurance companies often have similarities. Therefore, to choose the best life insurance, you should consider the following criteria:
- Evaluate the credibility of insurance companies through media sources or feedback from others, considering factors such as financial strength and branch network.
- Each insurance package comes with different benefits and payout levels. Therefore, insurance policies and contract terms should be transparent and clear.
- The insurance company should have good customer support policies and a dedicated customer care team.
- The company should offer a variety of insurance products suitable for different customer profiles.
- The company should receive positive feedback from other customers regarding the quality of their products.
In summary, life insurance serves not only as a means of financially safeguarding individuals but also holds several other important meanings. We hope that the article about What Is Life Insurance? Life Insurance Types And 5 Important Principles has provided you with useful information.