Life assurance is a type of contract that provides financial protection to the benefactors of the policyholder in the event of their death. The policyholder generally agrees to pay a monthly or annual premium amount to the insurance company, and in exchange, the company pays out a lump sum amount of money to the policyholder’s beneficiaries upon their passing.
Life insurance is an essential part of any financial plan, and it’s crucial for individuals to understand the benefits and types of policies available.
Types
There are 2 different types of life assurance:
- Term Life Insurance: it is a policy that covers the policyholder for a specified period, generally ranging from 1-30 years. If the policyholder passes away while the policy is active, their beneficiaries receive a lump-sum payout from the policy. If the policyholder outlives the policy term, they can choose to renew the policy or let it expire. Term life assurance is generally cheaper than permanent life assurance since the coverage period is limited, and there is no investment component within the policy.
- Permanent Life Insurance: it is more expensive than term life assurance, but it provides coverage for the policyholder’s entire life. A permanent policy is ideal for individuals that want to have a guaranteed payout, and it also has an investment component within the policy, known as the cash value.
The cash value within a permanent life assurance policy is invested by the insurance company on behalf of the policyholder, and it grows tax-deferred over time. Policyholders can borrow against the cash value or withdraw it outright.
Benefits
- Protect Your Dependents: The primary benefit of life assurance is the protection it provides for your dependents. If you are the primary breadwinner in your family, your death could leave them struggling financially. insurance ensures that your family can maintain their standard of living even after you’re gone.
- Pay for Final Expenses: it can also cover the policyholder’s final expenses, such as funeral and burial costs. Funerals can cost several thousand dollars and can help ease the financial burden on surviving family members.
- Estate Planning: life assurance can also be used to pay estate taxes or for charitable contributions. If you own assets that will be subject to estate taxes, your beneficiaries could end up with a significantly smaller inheritance. Life assurance can help offset some of these expenses and ensure that your intended heirs receive the full amount of your assets.
- Tax Benefits: Life assurance policies also have tax benefits. The payout from a life assurance policy is generally tax-free, and the premiums paid may be tax-deductible.
Drawbacks
- Cost: insurance can be expensive, especially if you opt for a permanent policy. The premiums for permanent policies are much higher than those for term policies, which can put a strain on your budget.
- Variable Returns on Permanent Policies: While permanent insurance policies do have a cash value component, the returns on these investments can vary over time. Depending on how the investments are performing, the cash value may not grow as much as you anticipated.
- Complexity: insurance for life policies can be complex, with multiple options and riders to choose from. Some policies may have hidden fees or may not be transparent in their terms and conditions.
Life assurance is an essential part of any financial plan, and it provides protection for your dependents in the event of your death. The type of policy you select will depend on your needs and budget.
While life assurance can be expensive, it’s crucial to assess the long-term benefits it provides. You never know what life may throw at you, and life insurance ensures that your loved ones are taken care of, no matter what happens.
