Why Investing in Life Insurance is Essential
For many of us, thinking about our own mortality can be uncomfortable and frightening. We’d rather put it to the back of our minds, concentrate on living rather than think about dying. However, for those of us who are older or who have children, death is a reality that needs to be faced.
What will happen to our loved ones after we are gone can be a concern, and it is a real fear for parents of younger children. Life insurance policies exist as a kind of failsafe should something like this happen. They can cover any debts we may leave behind and provide a level of financial security for our families after we leave them. Let’s take a look at the different types of life insurance, how they work, and why they are so essential. Keep reading to find out more.
What is Life Insurance?
Life insurance is a type of contract between an insurance company and a policy holder. It works by guaranteeing the policy holder that money will be paid to named beneficiaries in the event of the policy holder’s death. This money comes from insurance premiums that the policyholder pays throughout their life or through a single upfront payment.
While most life insurance policies work in essentially the same way, there are different types that can each offer unique benefits. Let’s take a look at some in more detail.
Term Life Insurance
Term life insurance guarantees that your beneficiaries or loved ones will receive a sum of money if you die within a specified period of time. This time period can vary depending on the terms of your particular policy, but say, for example, you have a 50-year term life insurance policy; if you die within 50 years your beneficiaries will receive payment from the insurance company. The length of the term can be decided between you and your insurance company and can affect how much your premiums cost.
Level term insurance sets a predetermined amount that your loved ones will receive in the event of your death, with this amount staying the same regardless of how many years into the policy you pass away.
Increasing term insurance is a type of life insurance that sees the size of the lump sum paid to beneficiaries increase over time. The later into the term you die, the more money your loved ones will be paid. This type of life insurance can be used to account for rising living costs and inflation, it can be useful for longer term life insurance policies.
Whole Life Insurance
Unlike term life insurance, whole life insurance guarantees a payout to your loved ones regardless of when it is you die, not within a set period.
Whole life insurance is often the most expensive kind, due to the fact that insurance companies will have to pay out the sum in the future.
Balanced cover whole life insurance will ensure that your premiums remain at the same rate throughout your life, despite any future health problems. The payout your beneficiaries receive will also be agreed and remain the same throughout the policy.
Maximum cover whole life insurance sees the insurance company use your premiums to make investments, intending for returns on these investments to cover the payout at the end of the policy. Premiums for maximum cover policies can be cheaper, however they are subject to change depending on the performance of the investments and can end up costing more in the long run.
Why is Life Insurance Important?
If you’re looking to provide a safety net for your family, should you die unexpectedly, life insurance is essential. What type of life insurance you choose to take out will depend on a number of factors, including your age, health status, financial situation, and the number of dependents you have.
Term life insurance is a good option for parents of young children. If the parents were to pass away while the children are still young, they would be unable to financially support themselves. What’s more, young parents will often have debts like mortgage repayments, which can be passed on to loved ones in the event of the parents’ death. A term life insurance policy can support them if they are suddenly obligated to continue making these payments.
Whole life insurance, on the other hand, can be more suited for people with estates that are too large to be exempt from estate taxes. Guaranteeing your family a payout when you die can help them cover some of these taxes. Additionally, whole life insurance can be used to fund a trust to support your loved ones and can be used to fund the purchase of your shares should you own a business with a partner or family member.
The subject of life insurance may be uncomfortable, but ensuring our loved ones are safe and financially secure is crucial. Life insurance can work to guarantee this, supporting them should they be left in a precarious situation or faced with completing our debts after we have gone.