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What Is Life Insurance? You Need To Find Out

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Sooner or later we will all leave this world. We usually don’t know when or how but it will happen. We will leave behind loved ones who depended on us in life and may struggle after we are gone. We owe it to them to make their lives after us as easy as possible and that generally means leaving them money or property if we have any.

Most of us are not wealthy but we can leave a nice little nest egg behind if we have taken out Life Insurance. So just what is life insurance? Basically, it’s a modest amount of money paid regularly to an insurance company to make sure that, on your death, those dear to you will receive an amount of cash to help see them through the difficult days ahead.

Types of Life Insurance

Life insurance falls broadly into two main categories – whole life insurance and term life insurance. The essential difference between them is that whole life insurance covers the person until their death when the amount insured is paid to the designated beneficiaries. Term life insurance, however, is valid only for a fixed period.

For example, if the term is ten years, the insured person pays fixed premiums for the ten years (as long as he is still alive) but the policy only pays out if the insured dies within that ten-year period. In other words, the money is effectively lost unless the insured dies before the term is up. There are also more specialized life insurance types available such as Mortgage Life Insurance and Accident Life Insurance that have different liabilities.

Insurance as an investment

While term life insurance is easier to understand and manage, it is usually more costly than whole life insurance and lacks the added benefits. With whole life insurance, there is often an investment part. This means that apart from the basic sum assured there is an added benefit. Term life insurance usually only pays the sum agreed when the policy is taken out. Whole life insurance has the added advantage that, often, you are allowed to borrow against the cash investment so that the policy actually functions as an investment as well as insurance.

How much should you pay?

Insurance companies will tell you that you should choose the highest premium that you can afford. This advice might well seem to be self-serving but it is, in fact, quite sound. In the first instance, your loved ones will need funds for funeral expenses and other costs that will follow your death. With one partner gone, it may be necessary to think about childcare or home help.

If you are the sole or main breadwinner, then your partner will be left with a hugely reduced income to cover all the usual expenses like rent or mortgage payments, health care, taxes and the weekly supermarket bill. If you want your family to have some financial security after you are gone, it makes sense to make sure that your life insurance policy will cover all these immediate costs and basic needs and other financial necessities as far into the future as possible.

Life insurance calculator

All insurance companies use life insurance calculators to work out the cost of your premiums. Once you have decided on the cover you must, various factors such as your age, your health history, your work, if you smoke etc will be taken into account to decide how much your premiums will cost. Basically, this is a risk assessment and the life insurance calculator comes up with an amount based on your answers. You can work this out for yourself online as most insurers have online life insurance calculators but these are only for guidance. You will normally need to speak to a broker or the insurer for an exact quote.

Life insurance is for you

For your own peace of mind and the future security of your loved ones, you should give serious thought to life insurance. It is safe and cost-effective way of proofing your family against the future.