What is life insurance?
In its simplest terms, a life insurance policy is a contract to provide a guaranteed payment of a lump-sum of money upon the death of the person who is insured. In return, the owner of the policy agrees to pay regular payments, called premiums, for a specified period of time.
Most of the forms of life insurance offered today fall into the category of either permanent insurance, which are policies designed to insure the insured person forever until they die, or term insurance, which are products that have a specified period of coverage called a term. Most term insurance policies are for 10 or 20 years, although other terms are becoming more common. We will cover the differences in a future blog. To determine if a policy is going to be offered by the insurance company, the person applying will be evaluated to see if they are a good risk. This process is called underwriting (stay tuned for more details about this!)
Why should I consider getting life insurance?There are many reasons why someone might need it:
- They have debts that will need to be paid off if they die. It’s common for banks to insist on mortgages being insured, for example, so that in the event the mortgage holder dies, the mortgage is paid off. (But mortgage insurance is NOT the best insurance to buy, in most cases. Read more about why here.)
- They may want to replace their income, so their family can maintain the same standard of living after they die.
- They may want to make sure there are funds available for their children to go to university.
- They may want to pay the tax bills on property that will be passed from one generation to the next after death.
- They may have business partners that will have to use the funds to keep the business going after the death of a founder, partner, etc.
- They may want to leave a significant contribution to a charity when they die, as a legacy.
What are common features of life insurance?This depends on whether the policy is term insurance or permanent insurance. These two types of policies often have very different features. Here are some common features or options of most insurance policies:
- They offer premium payment terms either annually (cheaper) or monthly (more convenient).
- They can offer a premium holiday in case you become disabled.
- They have an accidental death benefit that pays an additional lump sum in case you die in an accident, or an accident benefit that pays a reduced amount of money if you are in a serious accident but don’t die.
So do I need insurance?
That's up to you and depends on the needs indicated above, where you are at this stage of your life, and your personal feelings about being insured or not. Life insurance is not required like some other forms of insurance (car insurance) but it’s a good idea for most people to have a minimum amount of insurance at the very least, so as not to leave their loved ones with a bill for final expenses (funeral costs, medical costs, outstanding bills, etc.) when they die.
To see if you need life insurance, try out free life insurance needs assessment, which is part of the new InvisorGPS!