LIFE INSURANCE

What is a Life Insurance?

Life insurance is bought by someone in order to protect his or her family in case of death. This may be mainly bought by people who are the sole breadwinners of the family: without that money in the event of that person's death, the family couldn't survive. However, not many people truly know how life insurance policies work. Many people don't believe they can afford any life insurance and a few see it as an unneeded cost.

When take a life Insurance?

Why? Because the cost of life insurance cover is at an historic low.
Providing you’re in good health, if you took out life cover six years ago, in 99 out of 100 cases, you’ll find it’s cheaper now to get the same amount of cover. Even though you’re older and, in theory, a greater actuarial risk.
The reason life insurance premiums have come down is because of how the insurance industry reacted to AIDS.
Initially, premiums rocketed upwards but when the expected epidemic failed to materialise, from the mid 1990s onwards, premiums fell rapidly.

Term life insurance

Term life insurance is the simplest - and cheapest - form of life insurance. Basically, you decide the amount of money you want your nearest and dearest to get in the event of your premature demise.
Term life insurance pays a tax-free lump sum in the event of death within a specified period of your choice (known as the 'term'). Fixed monthly - or annual - premiums are paid for the duration of the term.
A whole bunch of variables - your age, gender, state of health, previous ill health, the term you require - determines how much the premium will be.
For example, a 32-year-old non-smoking male requiring $190.000 of cover for 25 years will pay around $20 a month. And the premiums are fixed for the whole 25-year term.
You’re covered for as long as you pay the monthly premiums. If you stop paying the premiums, the policy terminates. With this form of life insurance, there’s no investment element.
If you get to the end of the term and haven’t claimed, you forfeit all the premiums you’ve paid. No claim, no gain - but at least term insurance is cheap and the premiums remain constant.

How much life insurance do you need?

Sadly, almost nobody has as much life insurance as they think they have.
Many people insure their lives for &190.000 because it sounds like a lot of money - and it is.
But is it enough for surviving dependants to live off? Can it pay off all your mortgages, loans and credit cards and still leave a big enough sum to generate an income?
People hugely miscalculate the rate at which a family can get an income from a lump sum. At current levels, without risking the capital, the $190.000 may pay a maximum annual income of $8.000.
To calculate the amount of cover you need, a budgeting exercise should throw up the amount of money a household requires to maintain its standard of living for a year.
Take that figure and multiply it by a factor of 25, which allows for the tax you’ll pay on the income, and that’s how much of a lump sum you need a policy to pay out for your dependants to continue living their current lifestyle for 15 to 20 years.