Whilst having a conversation about death is something none of us are in a hurry to do, it becomes a necessity when you have loved ones to care for. If you have people in your life who would be financially disadvantaged by your death, then you must take out a life insurance policy to ensure they are protected from the consequences of living without your income.
Even though death is inevitable, and none of us can predict the future, we can still prepare for it. One way to go about this is to take out a life insurance policy.
Before we get into how life insurance can benefit your family, here is a recap of what life insurance is.
What Is Life Insurance?
Sometimes known as life assurance in Commonwealth nations, life insurance can be simply explained as an insurance policy that pays out upon your death. Although, when you start looking into different policies, it becomes clear that is a little more complicated than that!
Life insurance is a contract signed between an individual (referred to as the insured) and an insurance policy provider (the insurer). Under this contract, the insurer agrees to provide the insured with life coverage, in exchange for premium payments to be made regularly by the insured. At the end of the policy, the insurer is expected to make a death benefit payment to the named beneficiaries of the insured.
In that way, all insurance agreements are the same. However, they vary greatly in many other ways. The following are some of the different types of insurance policies.
Types Of Life Insurance
There are a number of life insurance policies, but they all fall under 2 main categories:
- Term Life Insurance: this insurance policy provides you with coverage for a stated period of time. Within this period, you are expected to make your premium payments as laid down in the contract. At the end of the period, the policy comes to an end. If you were to die before the policy ends, your named beneficiaries receive the death benefit. If you do not die during the term of the policy, then there will be no payout. Term life insurance policies can also be converted into permanent life insurance, should you wish to do this.
- Permanent life insurance provides full life coverage to the insured for the period of their life. While the death benefit is only payable to the insured’s beneficiaries at their death, these policies also come with a cash value accumulation. The insured can borrow from this cash value to cater for their expenses before they die.
Other life insurance policies include:
- Endowment life insurance
- Whole life insurance
- Universal life insurance
- Variable life insurance
How Can Life Insurance Benefit Your Family
As a breadwinner, you need to know the benefits of taking out a life insurance policy for your family and loved ones. These benefits include:
- Life insurance provides for funeral expenses: the death of a loved one can bring untold emotional pain. But this pain and distress can be worsened if the deceased was the family’s breadwinner and there is no life insurance policy in place. The emotional stress of losing a loved one combined with the financial stress of having to find the funds to pay for a funeral, can be overwhelming for some families.This is where life insurance comes becomes essential. As we have established, the cost of funeral expenses can be very high, and is a financial burden you would no doubt want your family to be free from. By paying for the funeral costs, life insurance saves your family from financial stress at this difficult time.
- Income replacement: as an earner, you may be the largest contributor to most of the family’s finances. This means that at your death, your family also loses the income you provide them with. As a result, it is necessary to make sure that provision is made for this loss of income.The death benefit received at your death from your life insurance policy ensures that your family is financially stable after your death. With this money, they can be protected from a drop in their standard of living.
- Debt relief: death is both inevitable and unpredictable, meaning that we might not have time to get our affairs in order before it hits. This means that often at the death of an individual, the family is left having to pay for outstanding debts.Leaving your family with money through the death benefit paid on life insurance, allows them to repay these outstanding debts while still leaving them with enough for their day-to-day living. These debts could include probate charges, credit card debt, loans and even inheritance taxes.
- Peace of mind: the peace of mind that comes with knowing your family will be taken care of after your death, cannot be underestimated. Knowing that you have set aside some money to provide for you family if the worst should happen, can bring a welcome relief from anxieties and worries.
- Cash Value: this is another way life insurance can help your family while you are alive. However, this option is only available to people with permanent life insurance. Permanent life insurance not only comes with a death benefit, but also with cash value accumulation. Once this cash value is built up, you can borrow from it and use it as a loan to fund payments for school or university tuition, business investments or other expenses. You can use the cash value as you like, however the loan must be repaid before your death. If not, the loan balance and interest would be deducted from your death benefit and the balance paid to your family.
Life insurance is especially important for breadwinners with families and dependents. This is why the benefits of life insurance policies are often focused on the needs of the family after the breadwinner’s death.
Life insurance handles all of the expenses that an untimely death can see a family burdened with, and allows your family to be free of additional financial worries at an already difficult time, and going forward into the future.