Family Security: Life insurance strengthens financial security for those left behind (file photo)
It's that time of year again when many of my personal insurance policies are up for renewal, including two life insurance policies. To be honest, given my age and expenses, I questioned myself whether I still needed them, considering that paying my term life insurance premiums only to benefit those left behind would not benefit me financially.
However, life has a way of reminding you why you make certain choices, and for me, that reminder came with a heartbreaking call from my good friend, who told me that her mother had passed away.
They say you go through five stages of grief (Kubler-Ross model), and when I lost my mom 13 years ago, I'd say those stages were pretty accurate for me:
– denied
– Anger
– bargaining
– Depression
-Acceptance
For my friend, I would say she is between Stages 2 and 3, as she is dealing with the grief of losing her last parent, and she and her brother are also carrying the burden of carrying out their mother's final wishes, while also taking on the financial responsibility for the funeral and celebration of life service (the anger stage), as well as all the other costs that come with closing a chapter in life.
Now, let's face it: Funerals, cremations, and celebration of life services come with a price tag. When you're grieving, you simply pay for it because it's a task that needs to be checked off the list.
However, as the initial shock begins to wear off, you begin to wonder why, in this example, the deceased spent her final months writing her last wishes for the service she wanted, as opposed to making sure funds were set aside for it.
The reality is that, in this situation, if his mother had a life insurance policy, she would receive a payout upon her death and these expenses could be covered. Yes, hindsight is 20/20, but this reminds you of the benefits.
With this in mind, I thought it might be helpful to understand life insurance, the options available and why people buy it.
At the individual level, life insurance is primarily designed to provide a financial safety net for loved ones upon the death of the policyholder, paying a death benefit to beneficiaries. It comes in a variety of forms to suit different needs, ranging from temporary coverage to lifetime coverage with investment options and/or dividends.
For those who are new to life insurance, it involves three key relationships that define its structure and operation:
The policyholder, who purchases and owns the policy from the insurer (insurance company), pays premiums to maintain coverage. This contract ensures that the insurer bears the risk of paying the death benefit upon the death of the insured.
The insured is often the same as the policyholder, but may differ (for example, a parent insuring a child); The life of the insured is covered, financial benefits begin if the insured dies. The policyholder controls the terms such as beneficiaries but must prove an insurable interest.
Policy beneficiaries are named by the policyholder to receive financial benefits bypassing probate for quick access. There are two types of beneficiaries: Primary beneficiaries claim first; If the primary beneficiaries predecease each other, contingent beneficiaries follow.
For most of us in Bermuda, we will have coverage in at least one of these types of insurance: group life, term life, or whole life.
Group life insurance is a single contract purchased by an employer to cover its employees. It provides a basic death benefit, often calculated as a multiple of salary, which provides financial security to workers' families. Coverage is generally automatic upon rental, and the cost is often subsidized or paid in full by the employer.
Term life insurance, on the other hand, provides pure financial protection for a specific period of time, or “term.” If the policyholder dies within that specified time frame, it pays a guaranteed death benefit to their beneficiaries. However, it lacks cash value and meets only temporary needs. This is generally the most economical and straightforward option.
Whole life insurance is a form of permanent coverage that lasts a lifetime. It guarantees a fixed premium and a fixed death benefit. Part of each payment builds up cash value, which grows over time. This makes it a conservative tool for lifetime protection and predictable, long-term savings.
Now, the decision to purchase life insurance is extremely personal, often driven by a deep sense of responsibility. Although it is a financial tool, its real value is in providing security and peace of mind to the people you care about most.
The primary reason people buy life insurance is to act as a safety net for their dependents. If you are a salaried person and your spouse, children or aging parents are dependent on your income, life insurance ensures that they do not face financial ruin after your demise.
This death benefit can compensate for lost income, helping the family maintain their standard of living and cover daily essentials. This is about ensuring that spouses are not forced to sell the family home and that children can still pursue their dreams, including funding for a university education.
Life insurance can also save loved ones from the burden of debt. Many people buy coverage to pay off the mortgage so their family has a place to live without the burden of monthly payments. It can also settle outstanding car loans, credit cards, or personal loans, ensuring that the burden of those obligations does not fall on a bereaved family member or even the co-signer of the loan.
Additionally, life insurance can cover final expenses – a policy can cover funeral costs, protecting relatives from unexpected financial stress during an emotional time.
After all, life insurance can be used as a valuable tool to cover the unexpected or inevitable. But one thing's for sure: People still see value in its protection because the one thing you never hear anyone say is, “I'm so glad they didn't have life insurance.”
Carla Seely has over 25 years of experience in the international financial services, wealth management and insurance industries. During his career, he has obtained several investment licenses through the Canadian Securities Institute. He holds the ACSI qualification through the Chartered Institute for Securities and Investments (UK), the Qualified Associate Financial Planner (QAFP) designation through FP Canada, and the Associate in Insurance (AINS) designation through the Institute of Securities and Investments (UK). He also completed a Master's degree in Business and Management through the University of Essex
For further inquiries or suggested topics, email justaskcarla@outlook.com