Other Personal Solutions
What is Life Insurance?
What does Life Insurance cover?
In basic terms, there are three main types of life insurance policies and coverage differs from one type to another. Fundamentally, all life policies provides a cash benefit should your death occur while the policy is in effect, however, differences in coverage can be found below:
Whole life: A whole life policy stays in effect for the rest of your life and includes a cash value component, although impossible to know how much, that can be tapped into while you are alive. Cash value component is part of the premium you and is accrued over time. A guaranteed death benefit is paid upon your death and the named beneficiaries in the policy are the payees. However, the cash value component is not paid to the beneficiaries. Thus, there is a guaranteed payment.
Term: A term life policy pays a death benefit to the beneficiaries named in the policy during a specific period (i.e. 20 years or 30 years) that is decided upon the policy inception. However, there is no cash value at policy maturity. Hence, there is not a guaranteed payment should a death not occur.
Endowment: An endowment policy not only covers the life of the policyholder and pays a decided coverage amount to the named beneficiary should a death occur, but also generates a certain amount throughout the coverage of the policy and is then availed at the time of policy maturity. Thus there is a guaranteed payment.
How important is Life Insurance?
Life insurance can provide financial security for you and your family in a wide variety of ways:
- Provide for your spouse and children: Payments can replace your lost income in the event of an unexpected death.
- Pay off the mortgage: The payout can cover the payment for your housing.
- Supplement your retirement: The cash value benefit of whole-life can act as a cushion for market volatility.
- Leave an inheritance: Your heirs will have an opportunity to better their lives and will be eternally grateful for your gratitude.
- Final expenses: Funerals can be expensive, so it can provide a chance to take the burden off of your loved ones.
- Replace earned income: Some policies allow you to collect the death benefit before actually passing away.
- Take care of estate taxes: Tax-free proceeds can be used to pay the government's estate tax bill.
- Peace of mind: Life insurance solutions can provide you a peace of mind knowing that your family financial well-being is secured after you are gone.
Who needs Life Insurance?
Whole life policies are most suitable for those:
- Funding a trust: Supporting children after your death
- Funding a buy-sell agreement: Allows the opportunity to fund the purchase of shares in the business if you're an owner of a business with a partner
- Paying estate taxes: Helps heirs pay estate taxes after you pass away
- Guaranteed benefit: As it is a whole life policy, your beneficiary will guarantee a death benefit
Term Life policies are most suitable for those:
- Safety net: If you are only concern over a specific period of time, usually working years where it can help pay off mortgage payment
- Your parents: Can obtain substantial coverage at a low cost and families can rely on it to replace loss of income should an unexpected death occur before their children reach adulthood
- Older surviving spouse: May be preferrable given the costs of other policies
Endowment policies are most suitable for those:
- Wants a disciplined route for savings: Premiums are paid regularly according to terms and conditions, and can still a habit of regular savings.
- Have various life goals: The amount accumulated can be used for long-term personal goals such as child's higher education, down payment towards a new house, or a new car
- Bonus provision: Both the sum assured and total accumulated bonus can be be provided at either policy maturity or after death
- Tax benefits: The death benefit is exempt from tax and can also reduce your tax liability
How much does a Life Insurance policy cost?
Other factors that may play a part in influencing the cost is health, gender and lifestyle. A 60 year old who regularly take part in extreme activities, smokes daily and drinks heavily is a higher risk to the insurer than a 30 year old with no underlying health conditions.