What is Life Insurance?
Life insurance is an agreement between an insurance company and individual, wherein the provider protects the client’s assets for monthly premiums. Under this plan, the issuer pays the customer’s family a specific amount of money after the policy holder passes away. There are two main types of arrangement: permanent and term life insurance.
The permanent alternative offers coverage throughout the client’s lifetime. It features a cash value addition that helps prolong the coverage while the client is alive. It also ensures premium payments while providing many financial benefits. A certain amount of the premium sum is invested, and cash values grow tax-deferred. However, the death benefit is payable from day one of the policy, whereas cash values usually take some time to reach a large amount.
On the other hand, term life insurance covers the client during a certain period, usually from 10-30 years. It’s sometimes referred to as pure life insurance since it doesn’t come with cash value components. In other words, nothing remains the moment the term ends.
You can also find several subtypes of life insurance:
- Whole insurance – this type guarantees your death benefit while maintaining a constant premium amount and growing your cash value.
- Universal insurance – while being less expensive, universal insurance features varying premiums, cash value, and death benefits, making it more complex.
- Burial insurance – it’s a policy with a small benefit, usually ranging from $5,000 - $25,000. As the name suggests, it’s meant to cover final and funeral expenses.
- Survivorship (second-to-die) insurance – the final type is a single policy that insures two clients, usually a married couple. When both of them pass away, the beneficiaries receive the death benefit. In general, survivorship insurance is included in larger financial plans to pay federal taxes or start a trust.
Why Was Life Insurance Purchased?
Customers obtain life insurance to provide some money for the beneficiaries after death. The recipients can use it for any purpose they elect. This includes paying the bills, mortgage, or covering tuition fees. Overall, life insurance often guarantees the client’s family can hold onto their property and pay for various things after they die.
Examples of Mis-Sold Life Insurance
Life insurance can be mis-sold in several ways:
- Getting life insurance under pressure – the salesperson may claim or strongly imply that you have no other choice but to obtain coverage. While the policy is valuable if there are mortgage or tuition payments, it’s not mandatory. Consequently, if the organization employs aggressive tactics, like exaggerating the risk of not having life insurance, you may be entitled to a refund.
- Lack of suitable explanation – a textbook example of life insurance mis-selling is if the company doesn’t properly explain all terms and conditions.
- Selling inadequate policies – the insurer may sell you a plan you can’t claim on.
- Poor advice on choosing coverage – if the insurer doesn’t offer all available policies, you may be eligible for compensation. For instance, if the provider only tells you about whole life insurance and doesn’t offer a cheaper option (universal insurance), the scheme was mis-sold.