What is a Life Insurance?
Life insurance is bought by someone in order to protect his or her family in case of death. This may be mainly bought by people who are the sole breadwinners of the family: without that money in the event of that person's death, the family couldn't survive. However, not many people truly know how life insurance policies work. Many people don't believe they can afford any life insurance and a few see it as an unneeded cost.
When take a life Insurance?
Why? Because the cost of life insurance cover is at an historic low.
Providing you抮e in good health, if you took out life cover six years ago, in 99 out of 100 cases, you抣l find it抯 cheaper now to get the same amount of cover. Even though you抮e older and, in theory, a greater actuarial risk.
The reason life insurance premiums have come down is because of how the insurance industry reacted to AIDS.
Initially, premiums rocketed upwards but when the expected epidemic failed to materialise, from the mid 1990s onwards, premiums fell rapidly.
Term life insurance
Term life insurance is the simplest - and cheapest - form of life insurance. Basically, you decide the amount of money you want your nearest and dearest to get in the event of your premature demise.
Term life insurance pays a tax-free lump sum in the event of death within a specified period of your choice (known as the 'term'). Fixed monthly - or annual - premiums are paid for the duration of the term.
A whole bunch of variables - your age, gender, state of health, previous ill health, the term you require - determines how much the premium will be.
For example, a 32-year-old non-smoking male requiring $190.000 of cover for 25 years will pay around $20 a month. And the premiums are fixed for the whole 25-year term.
You抮e covered for as long as you pay the monthly premiums. If you stop paying the premiums, the policy terminates. With this form of life insurance, there抯 no investment element.
If you get to the end of the term and haven抰 claimed, you forfeit all the premiums you抳e paid. No claim, no gain - but at least term insurance is cheap and the premiums remain constant.
'Whole of life' policies
The only other common type of life assurance is known as a 'whole of life' policy, which does contain an investment element.
Whole of life insurance provides you with life insurance cover for the whole of your life. The sum insured is paid to your dependants following your death.
Whole of life insurance is more expensive, because of the (regrettable) certainty that the life company will eventually have to pay the sum insured.
Monthly premiums are invested by the insurer into a life fund. The premiums and the sum insured are guaranteed not to increase for the first 10 years. After this initial period the plan is reviewed and, if necessary, the premiums may be increased.
If you抮e interested in this type of cover, it抯 best to see a specialised insurance broker or an independent financial adviser, as the investment element varies from insurer to insurer and some are more generous payers than others.
How much life insurance do you need?
Sadly, almost nobody has as much life insurance as they think they have.
Many people insure their lives for &190.000 because it sounds like a lot of money - and it is.
But is it enough for surviving dependants to live off? Can it pay off all your mortgages, loans and credit cards and still leave a big enough sum to generate an income?
People hugely miscalculate the rate at which a family can get an income from a lump sum. At current levels, without risking the capital, the $190.000 may pay a maximum annual income of $8.000.
To calculate the amount of cover you need, a budgeting exercise should throw up the amount of money a household requires to maintain its standard of living for a year.
Take that figure and multiply it by a factor of 25, which allows for the tax you抣l pay on the income, and that抯 how much of a lump sum you need a policy to pay out for your dependants to continue living their current lifestyle for 15 to 20 years.
