Updated: Jun 27, 2020
Life insurance is one of the pillars of personal finance, deserving to be considered by every household. Yet, despite its almost universal applicability, there remains a great deal of confusion, and even scepticism, regarding life insurance.
Perhaps this is due to life insurance’s complexity, the attitude of those who sell it or merely our preference for avoiding the topic of our own demise. However, armed with the proper information, one can simplify the decision-making process and arrive at the right choice for you and your family.
The following nine things are crucial when considering life insurance:
If anyone relies on you financially, you need life insurance. It’s virtually obligatory if you are a spouse or the parent of dependent children. But you may also require life insurance if you are someone’s ex-spouse, life partner, a child of dependent parents, the sibling of a dependent adult, an employee, an employer or a business partner. If you are stably retired or financially independent, and no one would suffer financially if you were to pass away, you don’t need life insurance. You may, however, consider using life insurance as a strategic financial tool.
Life insurance does not simply apply a monetary value to someone’s life. Instead, it helps compensate for the inevitable financial consequences that accompany the loss of life. Strategically, it enables those left behind to cover the costs of final expenses, outstanding debts and mortgages, planned educational expenses and loss of income. But most importantly, in the aftermath of an unexpected death, life insurance can lessen financial burdens at a time when surviving family members are dealing with the loss of a loved one. In addition, life insurance can provide valuable peace of mind for the policy holder. That is why life insurance is vital for the bread winner of a single-income household, but still important for a stay-at-home spouse.
Life insurance is a contract (called a policy). A policy is an agreement between a life insurance company and someone (or occasionally something, like a trust) with a financial interest in the life and livelihood of someone else. The insurance company pools the premiums of policyholders and pays out claims—called a death benefit—in the event of death. The difference between the premiums received and the claims paid out is the insurance company’s profit.
There are four primary players, or roles, in a life insurance policy. These roles are fulfilled by the insurer, the owner, the insured and the beneficiary. The insurer is the insurance company, responsibl