For most of us it is hard to face the reality that all of us die sooner or later. It is something we avoid thinking about - but if we do not plan for it, our loved ones could suffer unnecessarily when we die.
In a financial sense life cover is there to take your place when you die. It replaces the monthly or yearly income you would have generated during the rest of your life, making sure your family is not left destitute.
Without life insurance your family might have to sell their home when you die. Apart from that they might not have sufficient income to meet their needs, such as food, clothes, transport and more. And if you die while you are still young there might not be enough money to ensure that your children get a good education.
Life cover. The life cover is the amount which your insurance firm pays to your beneficiaries in the event of your death. This is the money that will ensure that your loved ones enjoy a secure future when you are gone.
You have to choose the correct amount of life cover in order to ensure that it is enough to take care of your family's needs. An excellent rule of thumb here is to take out life cover which will pay out at least 10 times your yearly income.
If you have large debts, for example a big mortgage, or there are other major expenses which your family will have to meet if you are no longer there, this amount should be higher.
Tax advantages. In the first place you will be able to deduct the monthly premiums you pay in respect of life cover from your income tax liability, up to a certain amount. Secondly the lump sum paid out by the insurance firm when you die will be tax free, depending on certain conditions being met.
Guaranteed payout. If you take out life cover for 100 000 USD, that is the amount that will be paid out when you die, regardless of the total amount of the premiums you have paid up to that stage. For example: even if you have only paid premiums amounting to 10 000 USD by the time of your death, your loved ones will still benefit from the full 100 000 USD payout.
There are mainly two types of life cover: term insurance and permanent insurance, also called cash value insurance. Which one to choose depends on how old you are and your specific needs.
Term insurance. This provides lifeinsurance for a specific period of time. After that time has passed, the cover stops. The policy has no cash value, so if the insured survives this period, the premiums can not be claimed back.
Cash value cover or permanent insurance. This type of insurance offers both life cover and a savings constituent. Depending on how the policy is structured, at the end of the term the insured will normally receive a certain amount in cash.
This means that when an individual dies during the policy term, he or she can rest assured that the insurance payout will meet his loved ones' financial needs. Should the insured, however, survive the policy term, a certain amount will be paid out - which can then be used for retirement or other major expenses.
Merely saving a certain amount of money every month in the hope that there will be enough to meet your family's needs when you die is like gambling: it might work, but chances are it will not. It can never replace the security provided by good quality life cover.