Insurance is so often seen as a grudge purchase. Something to limit a potential loss rather than something for which you gain real value. A ‘nice to have’ rather than an important strategic part of your financial plan.
Life Insurance is particularly difficult to consider since it deals with the prospect of our own death, and the subsequent financial implications we may not want to consider.
However, Life Insurance can be a very powerful tool to ensure that – once we have departed – we leave our loved ones with a gift and not a burden.
That said, Life Insurance presents very real costs now for the prospect of a benefit on an event we don’t plan to happen before it’s time. So, is it worth it?
Let’s start by understanding what Life Insurance entails. The umbrella category of Life Insurance encompasses several different products:
This is the primary product associated with Life Insurance. Simply put, in the event of your death, the covered amount is paid out to your nominated beneficiaries to be used to cover costs relating to your death (funeral costs, estate duties, outstanding debt etc) and provide for their lives going forward.
This cover will pay you, the insured, a monthly income if you are disabled through injury or illness and unable to work.
If you are diagnosed with a ‘dreaded disease’ - as defined in the insurance contract - (a stroke or cancer, or if you suffer a heart attack or undergo open heart surgery,) this cover will pay out a lump sum to the insured person.
Should you become disabled and permanently unable to perform your insured occupation this cover will pay a lump sum to you as the insured person.
Accident-only variations of the above products are available if, for some reason, you do not qualify for the standard products. These provide coverage only in the event of an accident or, for critical illness cover, only for cancer.
The value of salary protection, critical illness cover, and disability cover are clear and evident. Should something happen to you then you are protected against the financial burden of any of these life events. The many benefits of life cover are, however, less obvious.
Life Insurance can be thought of as an estate planning tool. As one part of this you can ensure that those financially dependent on you will be provided for in a manner corresponding to your living income. You can be sure that there will be funds available for your children’s education and healthcare and have comfort knowing that your family can maintain a lifestyle should you pass away.
An equally important part of estate planning is consideration of your financial position should you die, and what will happen with your personal assets. This may include secured debt such as the family car which can be provided for so it does not go back to the bank, or unsecured debt like outstanding credit card payments. This may also include personal assets which your family would like to keep yet, depending on the liquidity of your estate, may need to be sold to cover estate duties. Life Insurance can be a valuable tool to ensure that your family is protected from some difficult financial implications of death.
Some debt - such as a home loan - will likely require that you take out Life Insurance as a condition of your contract. Often the debt provider will arrange this insurance which will then form part of your monthly debt repayment. It may, however, be more cost effective for you to take out your own Life Insurance to cover this debt - perhaps as an addition to existing Life Insurance coverage. This coverage is very important as it will ensure that your home can be retained by your family should you pass away before it has been paid for in full.
Other unsecured debt will become a claim on your estate after your death. Depending on the size and nature of the assets in your estate at the time of your death your estate may not have sufficient liquidity to settle such claims, as well as estate duties and other fees. Life cover can provide the necessary liquidity to cover these and protect against your beneficiaries or dependents having to sell movable or immovable assets unwillingly.
We can see the value of Life Insurance for estate planning and ensuring your dependents are provided for should you pass away. We have also seen the value in protecting ourselves and our families in case of an unexpected life event. In the instances where a person has no dependents, and enough assets to cover their debts and the various costs and taxes incurred on death, or sufficient assets to cover all these costs and provide for dependents, then Life Insurance may be an unnecessary expense.
For most of us this is not the case or may only become the case much later in our lives. Life Insurance offers us security and confidence that we can provide for our loved ones in any eventuality. Furthermore, it can provide for us in case of an unexpected life event.
For these reasons Life Insurance is worth buying.
What about Salary Protection, Disability Cover or Critical Illness?
Our Life Insurance calculator is easy to use. All you need to do is answer a few questions and you will get an indication of your requirements. We do this by making assumptions, now we all know that assumptions can be dangerous, that is why we let you edit our assumptions in the assumptions tab.
So why not give it a try, we will email you a PDF of your results for your convenience. We will also mail you a link so that you can continue with an online quote via our online quoting system which is incredibly easy to use but thorough enough to give you a price based on your individual risk profile and your medical underwriting.
Posted in Insurance 101 on 15 Nov, 2022