Life Insurance
What Is It and How Does It Work?
Life is full of uncertainties. We can’t predict accidents, illnesses, or when our time will come. However, one thing is certain—we will all pass away eventually.
That’s where insurance comes in. It’s a financial safety net designed to protect you and your loved ones when the unexpected happens. Life insurance, in particular, is meant to provide financial support to your beneficiaries after you’re gone.
What Is Life Insurance?
Life insurance is an agreement between you (the policyholder) and an insurance company. You agree to pay regular premiums, and in return, the insurer promises to give a lump sum payout—called the death benefit—to your chosen beneficiaries when you pass away.
Simply put:
You pay premiums during your lifetime.
When you die, your loved ones receive a payout to support them financially.
Who Needs Life Insurance?
You should consider life insurance if there’s anyone who relies on you financially—like your spouse, children, or aging parents.
If you don’t have dependents or financial obligations that would affect others after your passing, life insurance might be optional.
Why Is Life Insurance Important? A Story of Angelo
Let’s take Angelo as an example. He’s 50 years old and the sole breadwinner for his wife and two young children.
Angelo has a home loan, 100,000 in savings, and 100,000 in debt. If Angelo were to pass away unexpectedly:
His creditors could claim the $20,000 savings to settle his debt.
The mortgage may go unpaid, leading to the family losing their home.
His wife and children would struggle financially, with no funds for daily needs or education.
But what if Angelo had life insurance?
If Angelo had a life insurance policy:
He would have paid a small portion of his income as premiums.
Upon his passing, his family would receive a death benefit payout.
This money could cover the mortgage, daily expenses, and his children’s education.
In many regions, insurance payouts are protected from creditors, ensuring his family’s financial stability.
Key Benefits of Life Insurance
1. Financial Security for Dependents
Life insurance proceeds can cover your family’s living costs, debts, and educational expenses after you’re gone.
2. Estate Protection
The payout can help settle estate-related costs like taxes or unpaid loans, ensuring your assets stay intact for your heirs.
3. Creditor Protection
In many places, insurance proceeds are safeguarded from creditors, meaning your family receives the full amount.
4. Tax-Free Payout
In most countries, the death benefit is tax-exempt, allowing your beneficiaries to receive the full sum without deductions.
How Much Life Insurance Do You Need?
To determine your ideal coverage, take the Initial Assessment to know more about what suits your needs based on the three key factors (from Financial Planning-Step 4).
Final Thoughts:
Life insurance is more than just a policy—it’s peace of mind, knowing that your family will be cared for even when you’re no longer around.
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