What is life insurance?
Life insurance is a contract between an individual and an insurance company whereby the individual agrees to pay an amount either monthly, quarterly, semi-annually, or annually as a premium in exchange for a payment from the insurance company if the individual dies.
The purpose of life insurance is to provide financial security for loved ones if the insured person dies. The family’s breadwinner should strongly consider the benefits of Life Insurance and if you have it also consider the importance of a named beneficiary in the event of death.
This makes life insurance a vital tool for personal financial management for both your family and your business if you own one.
Types of Insurance Policies
There are many different insurance policies, each with its own unique set of benefits and costs. The major types include
- Term life insurance,
- Whole life insurance,
- Universal life insurance
Term Life Insurance
Term life insurance is a good alternative for people who need coverage only for a set period. Term insurance is also known as temporary insurance because it offers coverage in specific periods known as ‘terms’. Depending on the policy term and other relevant factors, the term can be for ten, twenty, or thirty years or more.
Term life insurance only pays a death benefit if the insured dies before the term has expired. The premiums are usually lower than the other policies because there are no cash values on this type of insurance policy while premiums are being paid. Term policies can either be convertible or non-convertible.
Term life insurance is suitable for people with budget constraints and those who cannot decide what kind of insurance to buy but need security.
Whole Life Insurance
Whole life insurance provides life coverage, which means that if you die when the policy is in force, the insurance provider will pay your beneficiaries the death benefit.
It is sometimes referred to as permanent life insurance since it provides coverage throughout an individual’s entire lifetime. Whole life insurance builds cash value which serves as a savings element in the policy. This savings element most times is not present in term insurance.
Since you are guaranteed coverage for your whole life and the policy builds cash value, whole life insurance is usually costs more than term insurance.
Universal Life Insurance
Universal life insurance is similar to whole life insomuch as both provide permanent protection that lasts throughout an individual’s lifetime. However, universal life has more flexibility due to the fact that premiums can be changed and the death benefit adjusted at any time. Universal policyholders can also withdraw from their cash savings in the policy. However, this may affect your death benefit in some cases, and universal life policies can be more expensive than whole life.
When to get Life Insurance: Generally, the rule of thumb is that you should get life insurance when you have other people who depend on your income and will suffer if something happens to you. For most families, this includes spouses and children.
How much to get: The amount of coverage needed depends on your family members’ needs and what financial obligations they would be required to take over if you died.
For example, suppose you are the sole breadwinner in your household. In that case (you need it), it’s likely that your spouse would be at a severe disadvantage without your income, perhaps even unable to pay the mortgage or other expenses. On the other hand, life insurance isn’t usually necessary if you are single with no dependents.
Benefits of Life Insurance
As is apparent from what we have discussed so far, life insurance can provide you with peace of mind regarding the financial wellbeing of your dependents. This, however, is not the only benefit of having a life insurance policy. Let us look at some benefits of life insurance.
1. There is no tax on payouts.
One of the benefits of life insurance is that there is no tax on payouts. This means that your loved ones will receive the full amount of the payout without paying any taxes. This can be a huge help in times of need and provide much-needed financial stability.
Caveat: In the United States, insurance premiums are not admissible for tax purposes. In Trinidad and Tobago, the tax on general insurance premiums is at 6%, which is collected at the time of payment. For further information, click here.
2. Financial support for dependents
Life insurance can also provide a financial foundation for your dependents. This means that they won’t have to worry about meeting living expenses. Most insurance experts suggest that the value of your policy should be seven to ten times more than your yearly income. At this level, the dependents will live without financial constraints and pursue interests such as college education without added financial stress.
3. Burial expense coverage
Another benefit of life insurance is covering final or burial expenses. This means that your dependents won’t have to worry about the costs associated with your burial or cremation because most policies will cover these expenses.
4. Critical illness coverage
Insurance policies come with optional additional clauses called “riders”. Riders are additional benefits you can add to your plan. This means you can add riders to your policy to get coverage for critical illnesses, accidental death benefits, waiver of premium benefits, terminal illnesses benefits, and much more.
With a critical illness rider, your policy will provide payment if the insured suffers from a specific illness.
5. Additional financial support
Life insurance can also help supplement your expenditures while you are still alive. Yes, you do not necessarily have to die for your beneficiaries to benefit from the policy. Your whole life or universal life insurance plan can build up cash value over time, and you can use it to buy cars or make a down-payment on your mortgage.
Additionally, you can use the cash value to liquidate loans or put it aside as an emergency fund at retirement.
Life insurance is a way to ensure that your loved ones are taken care of financially if something happens to you. And it doesn’t just provide financial security; it can also help reduce stress and give your family peace of mind during a time of loss. So what are you waiting for? If you haven’t already, take the time to get life insurance and give yourself and your family the peace of mind they deserve.