This is Stage 4: Buy insurance for wealth protection. Before reading this article, please take the time to read:
Insurance plays an essential role to personal finance. It protects you against life’s uncertainties, such as sickness, disability and untimely death. It’s a means of replacing loss of income brought about by these circumstances, minimizing their impact on you and your family.
And that’s why insurance is also called wealth or income protection.
Personal risk management
Dying too young, being sick, or living too long are life’s risks. Insurance, together with emergency fund, forms part of your personal risk management. It ensures that you have adequate funds to meet unexpected situations. It prevents you or your family from taking on debts, and it ensures that the financial plans that you put in place will not be derailed.
Its primary benefit is to give you and your family peace of mind in times of your passing or sickness. You can be freed from any worries about the financial situation of your family should you pass on, or unable to earn an income due to illness.
It can be used as:
- fund to pay any outstanding personal debts, burial expenses, and medical bills
- income for widow or family
- money for children’s education
- collateral for a loan, such as home loan
- add to your retirement fund, such as the account value of variable universal life (VUL) policy
- a way of managing taxes for estate planning
What are the different types of insurance
There are many different kind of insurance policies, such as:
- Life. Also called death cover, it is a type of cover that leaves your family with money when you pass away.
- Critical illness. Also called trauma cover, it provides lump sum money to you and your family when you get sick of any ailments that are part of list of major diseases.
- Income protection. It provides monthly income to you and your family for a number of months or years in time of terminal illness or death.
- Total and permanent disability. It gives you money in time of disability, dismemberment and major burns.
- Health-maintenance organization (HMO). It is a health insurance that gives defined amount each year, called annual benefit limit, in time of sickness. It pays hospital bills, medicine, doctor’s fees, and even dental care.
How much life insurance do I need?
The amount of cover you need depends on your situation. But there are three basic things that you can consider:
- How much money will your family have in the event of loss of income? Take into account savings, investment assets, earnings and other sources of income that they will have when you are no longer around.
- How much money will your family need? This should include any debts, expenses, childcare, education, and other costs.
- How much can you afford? What you like or your family needs may be too costly for you, so think of the appropriate level of cover whose premium you can afford to pay.
What’s the difference between term life and permanent life
There are two types of life cover: term and whole life. Term life only covers a specific period usually a year, and you only pay for the period of coverage. Permanent life on the other hand covers you for life.
What is the difference between stepped and level premiums
Insurance is actually renting a big sum of money in exchange of a small sum. Premium is the money that you pay for insurance. It makes your policy stay in force. There are different types of premium:
- Stepped premium increases each renewal. It is cheaper in the beginning, and gets more expensive as years go by.
- Level premium remains the same, although most often it is adjusted to inflation.
Types of cover
The amount of cover is what you or your family are going to receive if you meet a condition of release. Just like premium, there are two types of cover:
- Increasing cover means that the amount you are going to receive is going to increase each year to account for inflation.
- Level cover means that the amount you are going to receive remains the same. That means, the value of the cover decreases due to inflation.
Insurance with investment
A variable universal life (VUL) insurance, also called investment-linked policy, is a unique product because it offers protection and savings. It provides a sum of money in the time of death, and at the same time it has invested cash value that may grow over time.