Life is full of events that we cannot plan for or predict. However, there are just a few events in your lives that are certain. One of these is death; while we cannot predict how and when, we do know that it will happen at some point. Holding a life insurance policy means that you do not have to worry about the financial implications of your eventual demise.
What is life insurance?
Insurance policies protect people when negative events occur. For example, car insurance protects you against the costs that you after a traffic accident. The only difference with life insurance is that it is protecting your loved ones, rather than you, in the event of your death. The premiums for life insurance policies can vary based on how old you are however, regardless of age, options are still available such as policies for over 50s life insurance.
How does a life insurance policy work?
While you are alive, you pay into a policy, as you would for any other type of insurance. Upon your death, the policy pays out to the individuals you named as beneficiaries when initially setting up the policy. There are two different types of policy that you can choose from:
- Temporary or term insurance – this is a basic policy that, as long as you pay in while you are alive, it will pay out an agreed amount when you die.
- Permanent life insurance – this type of life insurance still pays out on death, but it has an additional layer to it. Permanent life insurance can be used as a form of savings as it has a ‘cash surrender value’ and associated tax-free interests that accrue over time.
What can the money be used for?
The most common use for the money paid out from a life insurance policy is funeral costs. However, it can also be used to pay debts, pay off a mortgage, or even provide an alternative source of income for loved ones once the main income earner has died.
There are not many restrictions on who can be a beneficiary of a life insurance policy so the money could even be left to a good cause.
How much insurance should you take out?
There is no one right answer to this question. It depends on who you are making the beneficiary and what you want the money to cover. A relatively small policy will cover basic funeral costs. However, if you want your partner to be able to pay off the remaining mortgage, or have cash free to spend on other things, you will need a bigger policy. The size of the policy will also depend on how much you can pay into the insurance. The age at which you take out the policy and your general health will also affect the size of the policy and the cost of your premiums.
It can be tempting to forgo insurance, particularly when money is tight. While not investing in home insurance could mean having to pay out of the pocket for all repairs, the consequences of not having life insurance are a lot more severe. Your loved ones could struggle with burial costs and experience a severe drop in their income.
No one likes to think of their loved ones struggling after they have passed on; life insurance matters because it can help alleviate this concern.