In general life insurance is a service provided to you by an insurer, in exchange for a regular payment – normally monthly. This payment is known as the premium. In return, the insurance company will pay a lump sum to your family in the unfortunate event of your death.
For example, if you pass away whilst still employed, life insurance will protect your family from the financial suffering that could be caused by the loss of your salary.
Life insurance can also pay off debts left behind after your death. For example, if you have a car loan at the time of your death, your life insurance policy could give your successors enough money to pay it off.
There are two main types of life insurance: “Term Life” insurance and “Whole Life” insurance.
Term life insurance covers you for a set period of time, usually between 10 and 30 years.
If you pass away during this time, the insurance company will pay out a lump sum to your family, which can be used to cover funeral costs and support them in your absence. However if you die after the term has expired, there will be no pay out. Term life insurance gives you financial safety while you are earning money and supporting a family.
Term life insurance is useful if you only need life insurance for a certain period, such as while your children are living at home. This is why many people will take out a term life insurance for 18 years, between when their children are born until they are adults.
The single most important reason why people buy term life insurance is because their family is protected and continues to receive your income if you pass away during your working years. It is also usually cheaper than whole life insurance, as you are usually covered during your younger years.
Whole life insurance lasts throughout your whole life until you pass away.
Whole life insurance is most useful if you have people that are depending on you throughout their entire life. Whole life insurance can also be a requirement if you enter into a mortgage agreement with a bank or financial institution, so they are protected if you pass away.
Whole life insurance is usually used for wealth preservation and to make sure your family is financially well off if something happens to you.
Read the next article in this series: “How does life insurance work exactly?”
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