Is a life insurance policy a wise investment or a waste of money? The answer lies in when do you buy one. Many people consider life insurance a backup financial plan, while some might not understand how it works. If you are still confused about buying one, below are seven situations that life insurance that comes as a lifesaver to you and your family.
When you wish to ensure a safety net for your dependents
As we try our best to enjoy our life, no one can say for sure that death or other unfortunate events won’t happen to us one day. Should this happen unexpectedly, our dependents, such as parents or children, might be left behind with no financial capacity to sustain? To prepare for this case, many choose to buy a life insurance policy that allows their dependents to receive a “death benefit” that could assist them financially.
Harry – a single dad in Toronto – bought life insurance as a safety net for his son. “I work at a construction site, and who knows if an accident might take my life away someday. I needed to find some source of money that might help my baby son if that happened to me.”
This coverage is also a good choice for parents whose kids are going to college. If the parents wish to cover the tuition fees, they can buy a life insurance policy to help their children pay the school fees when they pass away.
When you want to prepare for your burial expenses
Truth be spoken, even your death might cost a lot more than you expected. According to In Memory, you might need to pay from $2300 – $13000 to cover your final expense in Canada, depending on the funeral forms. Since you don’t want to leave behind any burden for anyone, a life insurance policy will help your family cover this cost.
When you co-sign on a loan or mortgage
As cruel as it might sound, debt continues even after you die. Apart from burial expenses, there are other costs that your family and relatives have to cover after your death. In case you don’t have any life insurance and you cosigned on a loan or other liabilities with someone, that person has to carry the entire debt payment when you suddenly die. Some of the loans might include student private loan or credit cards. That’s why many schools advise their students to buy coverage to avoid leaving behind debt for their parents.
This is true for mortgages as well. For example, Lily and her husband took out a mortgage to buy their house. However, as Lily died from a stroke, her husband was requested to pay for the entire mortgage, which cost ~$500,000. Thankfully, since they had bought a life insurance policy, the husband was relieved from Lily’s debt.
When you run your own business
Imagine the CEO of your company suddenly passed away. There would be a lot of chaos in the company. Lots of companies are reliant on key persons that without those people, other employees might mess up, partners turned down contracts, stock prices went down, and the whole business suffers. This is critical for small companies, especially start-ups since they have little in their reserve funds.
In this case, there is a key-person insurance policy that can help businesses manage their risk better. As you buy this coverage for your company, the insurer will provide you with some financial support to compensate for the lost income that the insured would have earned. This helps you ensure the cash flow and buys you some time to settle things down.
When you have idle cash and want to invest
Most life insurance companies or agents might introduce to you the Unit Linked Insurance Plan – ULIP that will help you both save and invest your money. Basically, when you buy a ULIP, your money will be invested by the insurer, and you will earn equity as well.
One thing to know is that once you have invested money in a ULIP, you cannot withdraw your money for several years. The number of years might depend on the terms of the contract, so be sure to check that you have enough idle cash for this plan. Also, because your insurance company will take your money and invest it somewhere, be sure to choose a reputable one so that your money is not put at risk.
When you wish to finance your own pension
More people choose to work as a freelancer or run their business nowadays. They don’t have their boss or company subsidize their pension. A life insurance policy will help you receive your pension income when you get retired.
This insurance even works for those with coverage from your company. There is a chance that you might get fired or quit your full-time job at some points, which makes your coverage suffer. Thus, buying retirement insurance will help you be independent of your bosses.
When you want to leave behind your legacy
You might want to leave behind something for your beloved ones as you pass away. The insurers will help you to pass on your money and assets to your beneficiary with little or no federal tax. This is also the case when you want to donate to charities or other institutions upon your death. Many agents provide services that help you fulfill your wish or even multiply your donation.
Alex – a retired CEO, shared with us that he wanted to die broke. Instead of giving the inheritance to his children, he decided to entrust an insurance company to give his money to charities when he passes away. “I hope that my money will go to those who need it. That’s why I paid for the premiums”, Alex said.