Life insurance is designed to offer a financial safety net to your dependants in the event of your death. However, it is a complex subject, and one prone to much discussion resulting in a number of myths arising about the product and its value.
Many people assume that life insurance is an expensive luxury so neglect to take out a policy on the grounds of cost. However, life insurance can be bought relatively inexpensively as premiums vary depending upon the type and amount of coverage you require and your current age and state of health. In general, the sooner you take out life insurance, the better, as premiums rise significantly the older you are when you apply for cover.
It is widely thought that there is a simple, set formula for calculating how much life insurance cover you actually need; usually your annual income times 2,3,5 etc. The truth is, however, rather more complicated as two individuals with exactly the same income may need an entirely different level of cover according to their personal circumstances. Insurers take into account your assets, and how many people rely on you financially, for example, when deciding how much cover you require, therefore, two people with exactly the same income could pay a very different amount in premiums.
One of the most popular, and mistaken, assumptions that people make are that you need a life insurance policy in place in order to pay off your debts when you die. This is untrue as your debts die with you, and are not passed on to your heirs. If you have a large number of assets though that you wish to pass on to your heirs, but also have a significant amount of debt, these assets will be used to pay off these debts. Therefore, if you wish to protect the value of your estate a life insurance policy can be used to pay off any remaining debt and safeguard the inheritance received by your loved ones.
Some people have a term life insurance policy included in the benefits package that they receive from their employer, and they may presume that this cover is sufficient to cover all their needs. This may not necessarily be true as the amount of life insurance you require differs greatly between individuals. A number of life insurance policies offered by employers only cover death in the event of an accident rather than due to illness which may prove insufficient if you have dependents who rely on you financially. In addition, if you retire, or leave the company to seek work elsewhere you would probably lose your life coverage and it would be more expensive to take out a new policy in later life.
In general, life insurance is seen as only being of benefit to those who have young children. Whilst it is true that if you do have young children to provide for you do need life insurance there are also other circumstances in which life cover would be beneficial. These include having a spouse or partner who would be unable to pay for the household expenses without your income, or perhaps having a financially dependent older child who needs specialist care due to a disability.
Some people prefer to invest their money rather than pay for life insurance premiums. However, investing carries a large amount of risk; some may do well whilst others may not. Life insurance, on the other hand, provides a guaranteed pay-out as long as you meet the criteria of your particular policy. In addition, a life insurance policy would pay out within a very short time of you taking out the policy, whereas with investments it would take a considerable length of time to accumulate an equivalent sum guaranteed by a life insurance policy.
It is often assumed that if you are older, or suffer from certain health conditions, you will be unable to take out life insurance at all. Although it is correct that advanced age and pre-existing medical conditions do bump up the cost of your life insurance premiums, in most cases there are companies who offer life insurance policies regardless of your circumstances. It pays to do your research carefully, and to consult an experienced insurance broker if you need further advice.
If you are a stay at home parent you may automatically assume that a life insurance policy is not necessary as you are not the primary breadwinner. However, you need to consider the impact of your loss upon your family’s finances. Childcare costs are very expensive, as is the cost of employing a housekeeper; something that the remaining partner would possibly have to pay for in your absence if they were to continue in employment.
Many people assume that life insurance policies are all the same aside from the level of cover that they provide. This, however, is not the case as life insurance policies come in a variety of different guises including whole of life, term life, variable, or universal. Before taking out a policy it is important that you choose life cover that best fits your needs as the benefits offered by this type of policy can vary greatly; so do your homework first!
Life insurance can be confusing so it is important to dispel the myths and rumours that you may have heard before deciding whether a policy would be beneficial. You can do this by conducting your own research, or discussing your needs and requirements with an experienced insurance broker.