Life Insurance: Why and What Type?
Sad as it may be, it is a fact that you are going to die — the uncertainty for most people is when that will happen.
Your death is likely to have many implications and affect a number of people, but your immediate family will suffer the greatest loss.
Let us assume that you are married with two young children and you run your own business as an electrician earning $80,000 per year. You are the sole breadwinner, as your spouse stays at home to look after your children. On top of that, you have a mortgage of $200,000, a loan for $10,000, a credit card with an outstanding balance of $5,000, and, unfortunately, neither savings nor life insurance. Like most people these days, everything you earn is used to pay the bills.
So, if you die, how will that affect your family? Of course, they will be emotionally devastated, but what about the financial implications? Who is going to pay for your funeral, your mortgage, loan, your credit card, and all the other household bills, as you were the only one working? Oftentimes, we avoid thinking about this, as we live in a society that fears death and avoids discussing it at all costs.
Surely, all that your spouse needs to do is go back to work as a full-time IT consultant earning $80,000 per year and your family's financial situation will be fine, right? But then who will look after your two young children while your spouse is working? Either your parents or your in-laws, assuming that they are still alive, may be prepared to take on the responsibility, but they may be too frail to look after them.
Therefore, your spouse may need to revert to professional child care, which, unfortunately, will need to be paid for out of your spouse's income. The question remains: Where is the money going to come from to pay all of the other bills?
A potential solution to this situation would have been for you to have had sufficient life insurance in place to cover the funeral costs and to pay off your mortgage, your loan, and your credit card. In an even better scenario, you would have also been able to afford a more comprehensive life insurance plan that also covered the remaining regular household bills, enabling your spouse to stay at home to raise your children until they are no longer financially dependent.
If your spouse were to die using the same example, you may still need to utilize a professional child care service to look after the children. Therefore, it would make sense to also set up a life insurance plan for your spouse to clear the liabilities and provide sufficient funds to cover the costs of child care.
Now, having established from the above examples that there is a benefit to obtaining life insurance, how do you go about it? Furthermore, what sort of life insurance should you get?
First, you should seriously consider seeking financial advice from an independent financial advisor/planner who can assess your financial situation and recommend a suitable product. The reason for this is that there are many different types of life insurance, and it is important that you choose a policy that specifically meets your unique needs.
For instance, both term and permanent life insurance policies pay out a lump sum upon your death, but there are a few differences between them. Both will be briefly discussed next.
Term Life Insurance
A term life insurance policy is a simple form of life insurance that pays out a lump sum should you die during a specific period of time (term) ranging from one year to 30 years plus. If you are still alive at the end of the policy term, the policy will end and you will not get anything back, as there is no investment element built into term life insurance policies. Your premium is also fixed, and the policy may need to be medically underwritten, meaning that you may have to have a medical evaluation to qualify. Your insurance premium may depend on your credit score.
To complicate matters a bit more, there are different types of term life insurance, such as level, decreasing, convertible, renewable, and return of premium term life insurance. A financial advisor will be able to help you to find the most suitable option to meet your requirements.
Permanent Life Insurance
Permanent life insurance will provide coverage until you die, when it will pay out a lump sum; hence, it is more expensive than term life insurance. It also has a built-in savings element. Unlike term life insurance, your premium can vary during the life of the policy depending upon your plan. There are different types of permanent life insurance such as whole of life and universal life insurance, but your financial advisor will guide and advise you in this respect.
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