What is Life Insurance?
Life Insurance is a contract between the owner of the Life Insurance policy and a Life Insurance company, whereby the life insurance company agrees to pay a defined sum of money upon the death of the policy owner.
In return, the policy owner or payer (they are usually one and the same) agrees to pay a defined amount called a premium regularly, usually monthly.
The policy owner is nearly always the life insured: you insure yourself in order to protect your family. However, a wife can, for example, buy a policy on her husband’s life; or a business can buy life insurance on the lives of one of their employees to protect them against the impact of that employee’s death on the business. In these situations there has to be a clear insurable interest i.e. the policy purchaser must demonstrably suffer some kind of loss if the insured person dies. Otherwise it is open to abuse and turned down by life insurance companies.
Events other than death can be insured such as terminal illness, accidental death or critical illness.
Life Insurance should be viewed as a form of protection, but certain types of policies effectively act as enforced saving and investment vehicles useful for retirement planning purposes.
Policies usually have notable and understandable exclusions. They won’t pay out in cases of suicide, war, riot and civil commotion.
Life Insurance contracts are also written on the basis that both parties are acting in good faith. The policy purchaser should be able to assume that the contract offers what it says without having to fine comb the small print to look for exclusions and loopholes. However, it is also wise to go with reputable companies through an adviser, and to check you understand the details and exclusions. Equally, the insurer assumes you are being honest about the details, especially health and lifestyle, that you provide. Not being truthful about these details can invalidate the policy.
What are the benefits of Life Insurance?
- Primarily, Life Insurance is a protection against financial loss arising from death. It is a way of ensuring that your dependants or beneficiaries such as a spouse or children can maintain their standard of living in the event of death.
- It is easy to underestimate the impact of your death on others and therefore to forget the varied uses to which Life Insurance can be put. For example, Life Insurance could pay off your personal or business debts so that your dependants are not saddled with paying them off.
- It can ensure that your children would be able to continue their education without interruption.
- It could pay for childcare so that your spouse could go out to work to compensate for the loss of your income.
- It could pay for your funeral and other death expenses such as lawyer’s fees.
- It could pay for a family member with special needs who is dependent on you.
- Life Insurance can also be treated as separate from your estate as far as probate is concerned. This has a couple of benefits. One is that it can pay out quickly without having to wait for probate to be granted. Secondly, it means that creditors – those to whom you owe money at death – cannot make a claim against it.
- Life Insurance can be a good way of enforced savings: putting away regular amounts over many years.
- It also preserves your capital in a safe, conservative form.
What different types of Life Insurance are available?
There are two different types of Life Insurance available.
The first type is called Term Life Insurance which provides protection for a specified period of time or term. These policies provide a stated benefit upon death of the insured, providing that the death occurs within the policy period. There are no investment returns beyond this simple but vital benefit.
The second type is called Permanent Life Insurance because it covers the whole life of the insured. Unlike Term Life Insurance it has two elements: a death benefit and a savings component. The savings component can be used for wealth accumulation e.g. for use in retirement. The guaranteed cash values can provide money later on to help with temporary needs or emergencies.
There are two types of Permanent Life Insurance.
- The first is Whole Life policies which have a predetermined premium, a guaranteed rate of interest and a fixed death benefit.
- The second type are called Universal policies and they separate out the investment and death benefit elements rather than having them intertwined. The investment choices include some equity investments and can potentially therefore grow your wealth more rapidly. You can also change your premiums and death benefits to suit your budget and circumstances.
Is it for me?
Everyone who has dependants should have Life Insurance if they can afford it. It is one of the most fundamental forms of protection.
If you have children and a non-working spouse it is especially important.
You should see Life Insurance as a dynamic, fluctuating need. As you marry and have more children your level of life insurance should increase. As those children become independent and /or you retire, you can decrease your protection.
Your premium will be determined by the life insurance company based on your health and level of risk. You have to undertake a medical examination. The cost is then calculated using mortality tables compiled by actuaries. Actuaries are professionals who use mathematics and statistical probability and who constantly analyse the mortality data in their countries.
The main factors that are assessed are your age, your gender (women tend to live longer than men) and whether you smoke. Other factors include your alcohol intake, and your family’s health record as many illnesses have a genetic component to them.
What tips can ARM provide?
- If you have dependants, you should have Life Insurance.
- You should review your Life Insurance needs as you go through life.
- Shop around for the best deal from Life Insurance companies, and seek guidance from an advisor.
- Make sure you know of any important caveats within the policy before signing.
- You can reduce your premium by giving up smoking (if you do), by reducing your weight and taking regular exercise. More importantly, you will prolong your life.
- Term policies are good for short-term goals such as paying off a loan or for straightforward protection during the child-raising years.
- Permanent policies are better if you want investment value as well as protection. Universal, Permanent policies give you more flexibility and freedom.
How do I start?