What is Life Insurance and it's Benefits

Life Insurance and it's Benefits

Life assurance, life insurance… These two terms are commonly interchanged but they can mean one thing – financial security for your family in the event of your untimely loss. Upon your death, life assurance will kick in and pay your beneficiaries the sum insured.

Purpose of Life Assurance

Life assurance can be bought to address a variety of needs:

1. Replacement of Income. Your family depends on your income and your death will mean a loss of a considerable portion of the family budget. Life assurance, when planned carefully, can be used to replace this loss of income for years to come. This is particularly important if you have young children or aged parents who depend on you for financial support.
2. Mortgage protection. Buying a house is one of the biggest investments you will make in your lifetime. You would want to make sure that this investment is sufficiently protected, even when you are gone. Your family may not be able to keep up with the mortgage payments following your lose and may have to face the prospect of foreclosure. You can use life assurance to cover your mortgage so that your family does not have to worry about the mortgage payments. There are life assurance plans that are specifically designed to protect your mortgage.
3. Payment for End of Life Expenses. Your loss may also result in hospital bills, as well as funeral and burial costs. These expenses may be a heavy burden for your family to carry. The life assurance proceeds can be used to cover end of life expenses.
4. Fund your child’s education or retirement. This is especially true for cash value or endowment policies where you can expect a specified amount after the coverage period. You can schedule the length of the policy to coincide with the time your child will go to college or your retirement. Even with a non-cash value coverage, your family can use the proceeds to fund your child’s college education.
5. Security for Companies and business. Partnerships and businesses can make use of life assurance to fund agreements. Upon the death of a partner, a company officer or valued employee, the company can make use of the proceeds to protect themselves from the financial loss – to buy out the late partner’s share in the business or to compensate for the loss of experience and skill that the late employee or officer contributed to the company.

The Amount of Life Assurance You Need

It is important to determine the right amount of insurance. Buying too little will mean that your family will not have enough to fully compensate the loss of your income. Buying too much will mean that you may be paying for coverage you don’t need.

You need to calculate how much your family needs to live and approximately how long they will need this support (the number of years before the children can become financially independent). The average cushion is 2 years

Here are a few simple guidelines to determine how much insurance you’ll need:

A.    Determine your short term needs. This includes hospital bills and funeral expenses, estate taxes, loans (credit cards, car loans and so on), as well as a contingency fund for emergencies.

B.    Calculate your long term financial requirements. This includes the funds for your child’s education or the funds you will need to fully pay your mortgage.

C.    Determine the current monthly expenses of your family and multiply by 12. This should include your basic expenses such as food, clothing, utilities, rentals, transportation and travel. Then, multiply this number by the number of years you reckon your children will be dependent on you and your spouse.

D.   Calculate your available resources – savings, life insurance you currently have (especially one given by your employer), stocks and bonds, etc.

E.    Add up A, B and C. These will refer to your financial needs. Subtract D from this total to determine the amount of life insurance you will need to buy.

Underwriting for Life Assurance

By “underwriting”, we refer to the process by which the insurance company evaluates the kind of insurance risk you present. This is how the insurance company determines the premiums they will charge. The insurance company will look into your age, gender, health condition, your occupation and lifestyle, your family’s medical history and even your driving record and credit rating. This means that premiums for different individuals will also differ.

Pre-existing medical conditions may either be excluded from the cover, or, the insurance company may charge you with higher premiums. A pre-existing condition may also be grounds for the insurance company to refuse to provide you with coverage.

A special note on your smoking habit. If you smoke, you can expect your premiums to increase considerably. A smoking habit is considered a health risk factor that can cause certain kinds of cancer, heart disease and other health complications.

Kinds of Life Assurance

• Term Life Assurance. This kind of product assures of a payout when death occurs within the life of the policy. The coverage is only for a specified number of years, after which, the Insured can opt to allow the policy to terminate, renew the policy for another coverage period or convert the policy into another kind of life assurance product (if this is allowed).
• Whole Life Assurance. This provides coverage for the Insured’s entire life (although some policies have a maximum period of 80 to 100 years of age).
• Life Assurance with Endowment. This promises a payout either when the Insured dies within the coverage period or upon the maturity of the policy. This is ideal for those looking for a savings vehicle for a child’s education or for retirement. The coverage is for a specified number of years.
• Joint Life Assurance. You can opt to get coverage for both you and your spouse. It can either be a first-death or last survivorship cover. For first-death, the payout will be when either spouse pass away. Last survivorship cover will mean the payout is when the surviving spouse dies.

Anand Khemka
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