Life insurance provides a safety net for your loved ones against unexpected death. Life insurance is essential for anyone who has a family that depends on his or her income in order to live.
Most people rely on a regular income to survive and to fulfill their goals and dreams in life. If that income was to go, what then? Not everyone needs life insurance. Investments can successfully replace life insurance and are available even when the insured lives. Being wealthy should preclude the need for life insurance, but many wealthy people include life insurance as part of their portfolio.
In many ways life insurance is a waste of money. All those months and years of paying premiums for cover that you have never needed! But if and when something happens to change your life then the benefits of life insurance come into play.
There are alternatives to life insurance. To start you can accumulate great wealth. Start a business and turn it into a multi-million dollar corporation. A lifelong investment strategy can help build up reserves that can be used in an emergency or in the event of the death of the breadwinner. This requires strong discipline, and unless there is money in the family the investment is long term. You can live for the moment and hope that you never die.
Life insurance comes in two main forms. Term insurance provides cover for a fixed term and only covers death. If you die while the policy is in force then your beneficiaries get paid. But if you live, you lose! Term insurance is generally the most cost effective form of life cover it is simple to administer and it does not incur huge commission costs.
Whole life policies generally include an investment portion which acquires a cash value over time. These policies are much more complex and the cost includes huge commission payouts.
John and Mary are a young married couple living in a nice middle class neighbourhood. They have bought a house and are struggling to keep up with the repayments. When Felicite was born, Mary stopped working to become a full time mother. John is the main breadwinner in the early stages of his career. The cost of a new baby, running a home and two cars uses most of their resources. Life insurance takes a back seat. “We can’t afford it. We’ll look again when I get my next raise.”
If something happens to John, Mary will need to find employment fast! Felicite will have to go to a child care facility. Mary may have to adjust her life expectations. She may have to move to a cheaper area, find cheaper accommodation and consider a government school rather than the private education they had in mind. Luckily she is still young and will probably re-marry.
If Mary is the one that is lost then John will have to find additional resources to cover child care or a full time nanny. There will also be the loss of Mary’s future earnings (she did not plan to be a permanent home executive).
In these circumstances, life insurance could make all the difference. Ideally, the life cover should be sufficient to provide an income equivalent until the children are grown up. At worst, the cover would help the family survive through the adjustment.
Life cover cannot be taken out after the event. It is best taken young when health is good and the risk is low. Even though the health of the insured may change over the years, these new risks do not affect the cost of cover. Lifestyle changes such as becoming a smoker or taking up a hazardous occupation must be notified to the life company. Once one has a dread disease or a terminal illness it may be too late. Cover becomes prohibitively expensive or worse.
Ideally life cover should be coupled with investment. The greater the value of the investment, the less life cover that is required. This can be achieved through term life insurance and separate investments in equities and property. A whole life policy that includes an investment portion is a more expensive way to achieve this.
Yes, life insurance is needed. Don’t wait until you can afford it. Get it now. The best outcome is that you waste your money and never claim. The worst is that you don’t have cover when your family need it.