What is term life insurance?
Life insurance protects your family in case of your premature death, a risk that we rarely think about, but must manage.
Term life insurance provides a tax-free and lump sum payment that can be used to cover your outstanding debts, and help your family maintain the standard of living you intended for them.
You pay a premium to the insurance company for the length of the term, and in exchange gain the peace of mind in knowing your family is protected.
Who needs life insurance?
If your loved ones would be financially impacted if something happened to you, then you should definitely think about getting life insurance. If you have a family and any outstanding debt, getting life insurance is absolutely critical because your family would inherit your debt in the event of your death.
Why do you need life insurance if you are self-employed?
If you are self-employed, you are already exposed to a host of employment risks in terms of insecure income flows and a lack of employer-provided benefits. This makes covering your personal risks even more important.
Life insurance not only covers the debt that your family would inherit in the event of your death, but subsidizes some of your lost income so that your family’s financial security is protected.
How much life insurance do you need?
There are a few ways to quickly assess your insurance needs and determine how much coverage to purchase. You can calculate the total value of your major debts such as your mortgage, personal and credit card loans. You can also take an income replacement approach and multiply your net salary by the number of years that you want to replace it (learn more here).
How much does it cost?
The cost of life insurance is affected by personal factors such as your age, gender, medical history, smoking status, health and lifestyle. It is also affected by the comprehensiveness of your unique policy, and the length of the term you decide to get covered. Term life insurance is usually more affordable than permanent policies, especially if you purchase it at a younger age. It is always more affordable to get a life insurance policy when you are younger, because you’ll lock in a lower monthly premium based on your age.
What is a premium?
A premium is the amount of money you pay for an insurance policy. If you pay your premium, and have an active insurance policy, the insurance provider is contractually obligated to pay out a death benefit to you beneficiaries, in case of your premature death. In many cases, you can choose to pay your premiums once per year, or monthly. If you pay once per year, the total cost of insurance is usually lower.
What does term mean?
A term is a length of time that the policy will be in force, such as 10 years. In case of your premature death during the term, your beneficiary would receive a lump-sum and tax-free payment.
What is a beneficiary?
A beneficiary is the person you choose to receive the lump-sum payment from your insurance policy, in case of your premature death. You can name your spouse, children or other dependents, a family member or even a charity that you care about.
You can name one or more beneficiaries, and the lump sum payment will be divided based on the percentages that you assign. For example, you can choose to split the lump sum between your partner (50%), and your child (50%). If your beneficiary is a minor, you should name a trustee to hold the payout in trust until they are of age, and can legally receive the lump sum payment.
What is the difference between term and permanent life insurance?
Term life insurance covers you for a set period of time, provides temporary and flexible protection, and is usually more affordable than permanent life insurance products such as whole life or universal life.
Permanent life insurance products don’t have an expiry date, for as long as you pay your monthly premiums. These products combine the lump-sum death benefit payment with savings component, which allows you to build up a cash value on a tax deferred basis. The savings portion can often be cashed in or borrowed from at some future point.
Permanent life insurance products can be much more expensive, and is not always best suited to individuals who are on a budget. In many cases, you can start by purchasing a term insurance product, and converting it a permanent insurance at a future date. If you are interested in learning more about permanent life insurance, contact us at Bounc3.