What is life insurance?

Life Insurance – Most of us have heard of Life Insurance and appreciate that it is a policy, that pays out either a lump sum or a series of payments when you die.

In essence, the whole idea of life insurance is to:

• pay off your debts such as a home loan
• and support your dependants by replacing some or all of your income if you die

You pay premiums to an insurance provider and in return, the provider will pay out the agreed amount, (the ‘sum assured’), if you die during the life of the policy.

Life insurance policies can be combined with other forms of cover, such as trauma, disability and income protection policies so that you receive the lump sum if you are diagnosed with a serious illness.

Who needs life insurance?

Mortgage/home loan lenders encourage all borrowers to take out a life insurance policy, but it’s only really necessary if you have a partner and/or children. After all, if you’re young, free and single, who stands to lose out if you pass away? Your money would be better spent on trauma or income protection insurance instead, which pays a lump sum in the event of serious illness or an income if you can’t work because of long term illness, injury or disability.

At the very least, you should aim to insure yourself to pay off your home loan and debts and leave your partner and children with something to live on if you’ve passed away.

On the other hand, whilst no one wants to leave their family at risk of financial hardship, it’s just plain stupidity to try to leave your family a lottery jackpot by over-insuring yourself if you die. You’re far better off using the additional premiums towards trauma and income protection insurance. After all, big insurance payouts mean big premiums!

Remember that if you have something to lose, you have something to insure. Insuring non-working partners is often overlooked. It costs a small fortune to hire someone to run your home and take care of your kids. Don’t make the mistake of covering yourself and leaving your partner unprotected.

Another smart move is buying separate ‘his’ and ‘hers’ policies, instead of a ‘joint life, first death policy’, which pays out once and ceases after the first death, leaving the survivor uninsured. By buying two individual policies, you can get two payouts – potentially twice as much cover – for just a few dollars more. Individual policies also make life easier when it comes to separating or divorce, it’s a lot easier than dividing up a joint policy.

Thanks to advances in medical science and a modern standard of living increasing life expectancy, policies bought in the past may now be overpriced – even though you are a few years older.

It’s much easier to find cheaper cover online, thanks to a large number of price comparison websites and online brokers. Compare your existing policy to see how much you can save.