Life insurance can pay
your dependants money as a lump sum or as regular payments if you die. It is
designed to provide you with the reassurance that your dependents will be
looked after if you’re no longer there to provide.
The amount of money paid out
depends on the level of cover you buy. You can also decide how it is paid out
and whether it will cover specific payments, such as mortgage or rent.
There are two main types of
life insurance:
Term life
insurance policies
run for a fixed period of time (known as the ‘term’ of your policy) – such as
5, 10 or 25 years. These kinds of policies only pay out if you die during the policy. There is no lump sum
payable at the end of the policy term.
A whole-of-life policy will pay out no matter when you die,
as long as you keep up with your premium payments.
1. Life insurance has several purposes. Its most
important function is to replace the earnings that would cease at the death of
the insured. For businesses, life insurance is a way to protect key employees
and the business itself. A third purpose is to use life insurance to pay
potential estate taxes.
2. If you die during your earning years, your family
could suffer a severe economic loss as a result of losing your current and
future income. Unfortunately, your family would still have to pay its regular
bills, the mortgage, and outstanding debts, and perhaps even continue saving
for college and retirement. Unless you're independently wealthy, achieving
these goals may be virtually impossible for your family with the loss of your
steady income
3. Employers often purchase life insurance policies on
key employees to insure against the loss of services or income that might
result after an employee's death. Here, the proceeds from the policy are paid
to the company. Life insurance works for business partners too, where one
business partner purchases a policy to insure against the financial loss that
might result from the other partner's death or to buy out the partner's heirs.
4. Life insurance is also used to pay potential federal
estate taxes. Since these taxes must be paid in cash, life insurance can be a
good way to ensure the fulfillment of this obligation.
5. Life insurance offers a way for your family to
continue living comfortably and without worry.
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