Updated: Apr 27
Life insurance, despite being vital, remains one of the most misunderstood financial instruments. Many don't want to talk about life insurance because death, or just the possibility of a disability or illness, is scary. However, life insurance is one of the pillars of personal finance and is deserving of consideration and attention of every household. Here is a low-down on some of the facts of life insurance which are lesser-known or often ignored.
1. Your financial plan is far from complete if it does not include Life Insurance
You might have designed a short-term and a long-term financial plan, with all kind of financial milestones, and feel great about it. However, without life insurance, it is just another unworthy academic effort. A sound financial plan includes consideration for life insurance that will help your loved ones to continue sustaining a sound quality of life. Life insurance is an important part of your long-term and comprehensive financial plan.
2. Life Insurance is not an investment instrument
Well, philosophically speaking, life insurance is an investment – since it brings peace of mind. Not so in real financial terms, if you consider its under-par performance as an investment instrument. Experts insist looking at life insurance as ‘primarily a risk management tool’ and to consider other financial instruments if you aim to generate wealth to meet your financial goals.
3. You need more coverage than you think you do
Many people would buy a life insurance policy just to tick it off the checklist or would decide on the coverage based on the current income. However, inadequate coverage will not serve the risk management objective. Remember, every time you pay insurance premiums, you are working towards providing your family with an invisible financial backup in times of need. And you would want that backup to be good enough to maintain financial stability for your family.
4. You need Life insurance even if you are not the breadwinner
Strategically, life insurance helps your loved ones to compensate for lost income and cover costs. So obviously, life insurance is vital for the breadwinner of a single-income household. However, it could still be important for a stay-at-home spouse or parents. Stay-at-home parents perform valuable services which can be costly to replace for the survivor.
5. Life Insurance is not just about benefit payout in case of death
Many believe that life insurance policies only offer financial support in cases where the policyholder is no more. However, there are policies in the market that offer very good accidental disability or critical illness riders. These riders pay the specified sum insured if the policyholder becomes accidentally disabled or experiences a critical ailment. This can provide a vital safety net for you and your family if you are no longer able to work or are working in a limited capacity.
6. Life insurance could be surprisingly affordable
According to research, most people assume life insurance costs to be 3 times of what it actually is. In reality, it is a fraction of your overall spending. Let’s take an example – A term life insurance for a healthy 30-year-old will cost about $13 per month, whereas a pair of movie ticket with popcorn and drink will cost almost double of that. Amazing, isn’t it? Having said that, life insurance can get expensive if you have health issues or do not follow a healthy lifestyle or if you fall in for the bells and whistles of a life insurance product.
7. You can take a loan against your insurance policy
Surprised? Yes, that’s true. If you have a life insurance policy – except for Term policy - you can take a loan against it. It’s a great way to gain access to some additional funds without offering any assets as collateral. In other words, a plan that comes with a maturity benefit can also be used as collateral while borrowing funds, providing you with financial flexibility when you need it the most.
It’s not surprising that there is not enough understanding of life insurance, given that it is a low touch product. However, insurance agents are there to help you understand your financial needs and suggest the right life insurance policy at the right cost.
CEO and Co-Founder of linqrs mobile app, The Most Clever Way to Shop for Insurance. Former Insurance Agency Owner, College and NFL football coach.