A life insurance policy is as agreement between an insurance company and the insured individual. The insurance company agrees to pay a lump–sum payment to beneficiaries of the insured party upon his/her death in exchange for premium payments. This lump–sum payment is also called a death benefit.
The goal of life insurance is to offer a measure of financial protection in the event of the insured’s death.
Usually, life insurance is chosen based on the goals and needs of the owner. Therefore, before purchasing this type of policy, individuals should consider their financial situation and the standard of living they want to maintain for their survivors or dependents.
For example, one should consider who will be responsible for the final medical bills and funeral expenses, whether the family will have to relocate, and whether there will adequate funds for ongoing and future expenses such as mortgage payments, daycare, and college.
It is wise to re-examine one’s life insurance policy annually or after an important life event such as a marriage, birth of a child, major purchase, or divorce.
Life Insurance and Your Financial Plan
As people get married, build families, grow older and start businesses, they come to realize that life insurance is an essential part of having a sound financial plan.
This type of insurance policy is fairly cheap, which means that there is no reason why an individual cannot get coverage. A carefully executed policy can help individuals prepare for life’s uncertainties and give them peace of mind knowing that the people who rely on them will have some financial protection and a secure future.
Some of the reasons why people need life insurance include:
- It pays for immediate expenses
- It is an important cash resource
- The dependents’ standard of living can be maintained
- There are many types of policies to suit any situation
- This type of policy is considered a financial asset and may even improve one’s credit rating
- People who do not own any other property to pass on to their heirs can create a substantial inheritance by purchasing life insurance and naming their heirs as beneficiaries
- It offers peace of mind
Life insurance in Australia can often be funded via superannuation. Superannuation is an arrangement which people make to have money available for them in retirement. There are several benefits of funding insurance through superannuation.
- Insurance premiums are usually deducted from super contributions, not the monthly salary. This means that individuals do not have to dig into their pockets to pay insurance premiums.
- Using superannuation can be tax effective due to the many concessions available when making contributions.
There is no exact answer as to how much life insurance one needs; however, more insurance offers one more protection. Premiums typically increase with age because the older a person gets, the more likely he/she is to make a claim. When it comes to premiums, one may choose stepped premiums or level premiums. In the first category, premiums increase as one gets older.
On the other hand, level premiums do not increase as one gets older; however, they are more expensive in the beginning. Thus, individuals who want to control their costs over time should go for level premiums.
Before purchasing life insurance, you should talk to an insurance expert who can walk one through the advantages and disadvantages of available plans and help one choose the coverage that best works for any particular situation.