Understanding Life Insurance and investing in Life’s unexpected turns - PART 1
When life gives you the sourest lemons, What no one is talking about
“I like to think that one day you’ll be an old man like me talkin’ a young man’s ear off explaining to him how you took the sourest lemon that life has to offer and turned it into something resembling lemonade…” - Dr K, This is Us
Life insurance is one of the depressing areas of financial planning for me. It sometimes feels like money going down the drain money that I will never be able to get back. Life insurance is a product that allows you to leave behind money for your beneficiaries, i.e. the people you want to benefit when you die. But I am, in my early 30’s, I’m fit and healthy and have no plans of dying anytime soon so do I really need life insurance?
I don’t know about you, but this was a question I battled with and still battle with. I am at a stage in life where I have so many bills and things requiring the attention of my wallet, that adding life insurance to the list does not fill me with glee at all!
Why Do I need Life Insurance?
But just like the bird that shat on me the other day ( thank God it was on my coat and not my weave) or the nail on the road I just had to drive over which punctured my cars’ tire, no one ever expects the unexpected. Life insurance is a form of protection for your loved ones ’financial well being should your life come to a sudden end.
One reason why life insurance turns me off is that I don’t understand it all. I don’t understand the jargon used, the different types of life insurance, what I will actually be covered for or which one best suits me. It’s all so confusing and depressing. When I am confused, I just tend to shut down and move on from the subject.Plus I hate talking or thinking about death.
But as a mother of two young children, burying my head in the sand doesn’t lead a good example, so I am going to face head on the worst case scenario my family could ever meet. The premature death of myself or my husband.
In this post, I will discuss;
3 main types of lemonade makers, i.e. Types of life insurance and who they are best suited to
These are Term assurance, Family income benefit and Whole of life insurance.
Lemonade preservation, i.e. Protecting your payout from tax; all about Trusts
Insurance Add-ons e.g Critical health insurance, Income replacement insurance and Mortgage protection
Shopping for your lemonade maker, i.e. Finding the right insurance brokers
What is Life Insurance
Great now let’s get into it. Life insurance helps your loved one pay off massive debt such as your mortgage, replace the lost income and assist in maintaining the family's lifestyle if the policyholder (the person who has insured his/her life against death) should die.
So if Dad dies and leaves his wife, and four kids all under 17 years old all still living at home. (sorry I used Dad just because generally women live longer. However, I hope you and your family live to a ripe old age.)
His life insurance payout should provide enough money to pay off the rest of your mortgage or any debts so that you don’t have to worry about losing your home.
The life insurance payout should also have enough money to cover the loss of Dads annual salary, house bills, current children’s school fees, and university fees and any other lifestyle need.
No matter the type of life insurance you have you will have to pay a monthly premium, i.e. monthly charge which depends on your age, health, lifestyle.
3 main of lemonade makers, i.e. Types of life insurance
“Nobody loves your family more than you do” - Sharon Lechter
There are 3 main types of life insurance, these are Term Assurance, Family Income and Whole of Life. Read all about all three and decide which is best for you and your family based on your particular circumstances. Such as if you have large debt, children of school age, and how good you are with budgeting. The main difference between all 3 difference is based on how long you want to be covered for.
Term Assurance
This is the most common type of life insurance. It is also called ‘Term Life Insurance’. You (the insured) decide how long you want to be covered for, e.g. 30 years or more or even less (this is called the term or term life), and you decide how much you want to be insured for (the payout), i.e. the amount your family will receive if you die.
You will be given a monthly premium ( i.e. charges) that you have to pay. The failure to do so will void your insurance, and you will not be entitled to a refund. The length of your cover, however, does affect your monthly premium.
Getting Paid :(
If you die within the ‘term time,’ i.e. within the 30 years and you have been diligently paying all your monthly premiums then your insurance provider (the insurer) will pay the full agreed amount to your beneficiary ( the person or people who you have put down to receive the money in the event of your death, i.e. your family).
Yippie you live :)
Hopefully, life goes according to plan, and you live till 100, but your term ran out when you turned 75 years old, you don’t get any cash back, and neither does your surviving family get any payout. But having life is the most important thing.
Suitability Checklist: Is Term Assurance for you?
Here is my checklist to find out if the term could suit your needs. Can you answer YES to all these questions? If you can, you may have found a good fit for your family.
Do you have people who are financially dependant on you?
Do you have a joint mortgage?
Do you have other joint debts e.g. car loans?
Are you the main breadwinner?
Are you the primary childcare provider if you have children?
Can your family handle household bills without your income?
Term Assurance is best suited to people who want their payout to cover an enormous debt, e.g. mortgage or to raise a family and educate their children.
There are 3 types of Term Assurance.
Level Term: Here your payout amount and monthly premiums remain the same or level throughout the period.
Decreasing Term: Here your payout amount and monthly premiums decrease over time.
Increasing Term: Here your payout amount and monthly premiums rise as the years' pass.
Joint Life Insurance ...when 2 become 1
You can take our term life assurance solo or as a couple ( you don’t have to be married, you can even be business partners). This is the policy my husband, and I have, but it is essential to know that although two lives are covered by the policy, there will only ever be one payout after the first partner dies. On a positive note, it is cheaper than buying two individual insurance policies because of this (i.e. the one payout).
However, I must highlight the downsides to this “insurance marriage”.
Like I said before there will only be ONE payout after the first partner dies. If the most “sourest-est” lemons do get served up and both policyholders should die at the same time, there will still be ONLY ONE payout paid to the beneficiaries ( loved ones you are trying to protect financially).
It’s a sad fact that 50% of real marriages end in divorce and the courts can split up your assets, so each people gets a fair-ish share.
NOT so with Joint Life Insurance.
Should your relationship end (personal or business) you can not split the cover into two individual policies. It is important to remember that one thing that affects your monthly premiums is your age. So after the first partner passes, the surviving partner will have to arrange new life insurance which will probably be more costly if you are much older.
How long should the term be?
That is entirely up to you. You can get cover for as long as you feel necessary and this will vary for everyone depending on what you are most concerned about.
Let’s look at an example:
If making sure your family is not made homeless because they could not afford mortgage repayments after you are gone would keep you up at night, choose a term period which is at least as long as your mortgage term. So if you have a 25 year mortgage, get your Life Insurance for 25 years.
If ensuring your children are taken care of till they are financially stable and move out whenever that may be (let’s say till age 27) then you may want a cover that will take that into consideration.
Or maybe your main concern is covering your income until you retire and start to receive your state and private pension.