UNDERSTANDING LIFE INSURANCE: WHAT IT IS AND WHY IT MATTERS

In today’s uncertain world, planning for your future is crucial. One sure way of securing your family’s future is through Life Insurance. It is designed to reassure you that your loved ones will be financially cared for if you pass away.

What is life Insurance?

Life insurance is a contract between you and an insurance company where you pay premiums and in exchange, the insurer promises to pay a sum of money to your beneficiaries in the event of your death or after a set period. 

Depending on the type of cover and contract terms, other events such as critical illness and temporary or permanent disability may also trigger benefit payments. 

Purpose of Life Insurance

The main purpose of life insurance is to provide Financial Protection. It aims to cushion your loved ones against financial challenges and hardships upon your death. Knowing your family will be financially secure when you’re gone provides peace of mind. 

How does Life Insurance work?

It works by providing a death benefit payout to your beneficiaries in the unfortunate event of your passing. However, the policy needs to be in force when you pass away for the death benefits to be paid out, with the premiums paid as required before you pass. 

What does Life Insurance cover?

It mainly covers all causes of death, except death by suicide. Depending on the type of cover and insurer, some life insurance policies also provide compensation for:

• Critical illnesses such as heart attack, kidney failure, cancer, and major organ transplant
• Illness (comes as a policy rider option)
• Accidental death
• Accidental disability

What are some of the Life Covers exclusions?

Life Insurance exclusions vary depending on the cover and insurer. The typical exclusions include:

• Suicide
• Death due to violation of criminal laws
• Alcohol and drugs-related issues
• Military or war-related engagements
• Participation in high-risk sports such as boxing
• Undisclosed pre-existing medical conditions before issuing the policy.

What are some of the Life Insurance rider options?

Some of the common life policy riders are:

• Accidental Death Rider– It pays out an additional amount of death benefit if the insured dies by accident.  
• Waiver Of Premium Rider– This rider allows waiver of all future premiums if the insured becomes permanently disabled or loses their income due to injury or illness before a specific age.
• Critical Illness Rider– Provides additional protection in the event of critical illness. It’s paid on the first critical illness diagnosis defined under the policy before a specific age. Most life insurance providers usually pay up to 50% of the sum assured, upon diagnosis, for this rider option.

Types of Life Insurance

The main types of life Insurance are:

1. Term Life Insurance
2. Whole Life Insurance
3. Endowment Life Insurance

1. Term Life Insurance

Term life insurance provides coverage for the agreed policy term. It pays out the death benefit to your beneficiaries for as long as your policy has not expired, and the premiums have been paid in full. The typical choices for policy lengths are 10,15,20,25 or 30 years and it is renewable on a year-to-year basis. It’s relatively cheaper than whole-life insurance. It has no surrender value, no cash value, and is not permanent. These types of covers only provide coverage for the set period (policy term) if the policy is active. 

2. Whole Life Insurance

It’s a type of permanent life insurance that provides coverage for your entire lifetime and pays out the death benefit upon your passing, for as long as your premiums were fully paid when the policy was in force.

3. Endowment Life Insurance

Endowment policies include a savings component with a fixed interest rate that builds and accommodates a cash value over time, making it more costly than term-life policies with the same coverage. The cash value does not affect your death benefits upon passing and is accessible as partial withdrawals or policy loans. Unlike term life covers, endowment covers have a surrender value that is paid out when one decides to end the policy before the agreed term ends.

Benefits of Life Insurance

• Financial Security– Life insurance provides a safety blanket for your family and shields them against financial burdens in the event of your unforeseen demise as the sole breadwinner.
• Tax Benefits– Life insurance policies are entitled to tax relief on the premium (usually a percentage set by the state). Since the benefits are tax-free, your beneficiaries will also not have to report the money when filing returns after or during payouts.
• Savings– Life Insurance policies can be used to save for financial goals such as building a new home, college fund, etc.
• Riders– Riders are add-ons that pay out additional benefits and can help you customize your coverage to suit your needs.
• Death benefits– Life Insurance policies usually pay out a predetermined amount to the insured’s family in case of loss of life.

Life Insurance Frequently Asked Questions (FAQs)

What are some of the factors that affect life insurance premiums? 

• Age– The younger you are, the less you pay because your mortality risk is less in comparison to older individuals.
• Health– Insurance companies look at health factors such as your medical history, body and weight, risky behaviors, and family medical conditions when determining life insurance quotes.
• Gender– Women have a longer life expectancy than men thus, they generally pay less than men for life insurance.
• Smoking status– Smokers generally have higher rates because they pose a bigger risk when compared to non-smokers.
• Cover length and amount– The type of policy you buy, and the amount of coverage are critical factors when determining the amount of premium payable. Generally, term life covers are the least expensive while whole life covers are the most expensive.  

What is a policy rider? 

• Policy Riders are add-ons that can be bought with a basic insurance policy to provide additional benefits to the policyholder.

 Will I incur extra costs for the riders?

•  Policy riders usually come with an additional cost. However, the premiums are generally low when compared to that of the main policy. 

Who is the beneficiary? 

• A beneficiary is the person/entity the insurer nominates to receive the death benefit after their passing.

Am I allowed to have more than one beneficiary? 

• There is no limit to the number of beneficiaries one can have. You can name multiple beneficiaries and decide the percentage they each will receive after your death.

Can the beneficiaries use the death benefit paid out for living expenses? 

• There are no restrictions on how beneficiaries can spend the payouts. They can use the money paid out for whatever purpose they choose including, paying for living expenses, funeral costs, and funding children’s education.

What payout options are available during maturity? 

• Depending on the insurance company and type of cover, the insurer can decide whether the beneficiaries should receive benefits payouts as a lump sum or in installments for a specific period and in specific amounts. 

How do I choose the right life insurance cover?

•  Life insurance covers vary depending on the cover type and insurance company. Consider your needs, and specific life stages before deciding on a life insurance policy.

Understanding what life insurance is, its purpose, and why it matters empowers you to make informed decisions that align with your financial goals and priorities when purchasing life policies. Life insurance is more than just a financial protection tool; it’s a testament to your commitment to safeguarding your future. 

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