Taking charge of your personal finance is all about choosing how you want to grow and spend your money. However, what happens when you die? Once you cease to exist in this world, you can no longer control your finances – unless you put plans in place before you die. This is what life insurance is all about, making plans for when you are no longer here.
What is Life Insurance?
Life insurance is a contract between you and an insurance company. You pay a premium (a sum of money) either a single sum all at once or periodically, and the insurance company pays a benefit to your beneficiaries (children, spouse, etc) if you die before your policy matures or when it expires. You can get life insurance if you are healthy or sick, depending on how much coverage you want to purchase.
Life insurance helps protect your family’s financial future if something happens to you. It can even help save them money in case of an emergency expense. If you’re not sure whether or not you need one, consider these questions:
- Do I have enough savings?
- How much do I need on hand?
- Will my spouse support me financially if something happened to me?
- Are there any other family members who depend on me financially?
- Am I financially fit to plan for what happens when I die?
Common Insurance terminologies
While you contemplate those questions, there are some common insurance terms you will hear over and over again. Here are some of them to help you understand the concept better.
- Assured/Insured: this is the person the insurance policy covers. Another term for them is ‘policy holder’.
- Beneficiary: the beneficiary is the person who is signed as the receiver of the death benefit once the assured/insured dies.
- Insurer: an insurer is the insurance company that provides the insurance policy. The company is sometimes called the ‘carrier’.
- Premium: a premium is the amount of money the insured/assured pays to the insurance company either as a single upfront payment or regular payments.
Why do people get life insurance?
Life insurance can help protect your family from financial hardship if something fatal happens to you or they aren’t able to afford funeral costs. It also helps ensure that everyone gets paid what they’re owed so no one has any trouble paying bills after someone dies unexpectedly. In difficult cases when someone dies due to circumstances such as cancer or heart attack/stroke, life insurance really comes in handy.
It’s not just about protecting your family from financial loss, but also providing for their future needs.
Advantages of having life insurance
1. Income replacement
If you are a breadwinner in your family; you pay the rent or you play a major financial role, your demise may leave your family heartbroken both from the emotional effect of your loss and the financial effect too. Your role as a major provider is now vacant. However, with life insurance, you can ensure that your loved ones keep receiving financial help even while you are gone. It serves as an income replacement for them.
2. Debt erasure
Life insurance can be a good way to pay off any debts you or your family may be owing when you are gone. Loans on cars, housing or school can be repaid with the benefits the insurance company provides your beneficiaries after your death.
3. Chronic and terminal illnesses
Although people associate it with death, life insurance is not just to help those left behind when you die. It can also help you when you are alive. Some policies allow for endorsements or riders. These riders allow you to access some of your death benefits under certain conditions such as a chronic illness, etc. Some policies allow you to use your life insurance to pay for your healthcare.
Most children depend on their parents for funding especially when it comes to education. However, if the parents die while the children are still in school, life insurance can be helpful here. It ensures that the financial support does not die with the parents. The children can be educated as the parents would have wanted them to.
5. Burial expenses
There is a witty quote that says, “it is now more expensive to die than to live”. An average casket in Nigeria costs between N50,000 and N350,000. This is excluding how much you have to pay to get a cemetery plot, pallbearers, etc. All this can be a lot for those left behind. Some cannot afford this expense so they leave their dead in the morgue for months until they have enough money to conduct a proper burial. Your life insurance can take this burden off your family’s shoulder.
So now that you know the benefits, there are different types you can get. Here are the two common types:
Two types of life insurance
Whole life insurance
This is the most common type of life insurance and it’s also called traditional life insurance for this reason. Whole life insurance lasts for as long as you live. While you are alive, you pay regular premiums and when you die, your beneficiaries receive death benefits. It also includes something called cash value which is basically a savings portion that accumulates interest over time.
Term life insurance
This policy guarantees payment of a death benefit if the insured person dies during a specific period of time – a term. If the term expires and the insured is still alive, the insurance is mostly renewed automatically if not canceled by the customer ahead of time. They’re cheaper than whole life because they don’t guarantee any savings component; instead, they just pay out death benefits when the insured dies within their term period (typically 10 years).
Let’s do a little recap: life insurance is a contract between you and the insurance company. You pay a sum of money (premiums) regularly or a bulk sum at once and when you die or when your term expires, your beneficiaries receive a sum of money (death benefit) from the insurance company.
Life insurance isn’t something you should do just because it’s a good idea. You should get one if it makes sense for your family or yourself, and you can afford to pay the premiums. It is an important financial tool that can help protect your family’s future in case of an unexpected loss.
To better understand how to prepare for unexpected circumstances, check out our article on handling financial emergencies the right way.