The ABC of life insurance

The ABC of life insurance
23 December 2011

WHAT if you die? What if you need medical attention? What if you become critically ill? Your own mortality is not a pleasant topic, but it’s a very important one.

If we don’t worry about these things, and statistic show that most people don’t, who will? Unfortunately, these things do happen and they often occur without prior warning.

Only once you’ve ensured you are protected and covered in the event of such catastrophes can you move onto more enjoyable aspects of financial planning, namely retirement and lifestyle planning, to ensure you can lead the life you desire.

First things first. Let’s look at the foundations you should put in place before planning for your future...

Why take out life insurance?

We all know for certain that one day we will die; it is just a question of when and how. If this happens when most of us would like – well into our old age and retirement – there are unlikely to be significant repercussions.

However, should this occur unexpectedly and without warning at certain stages in your life the repercussions can be devastating for those left behind. Yet, statistically, we are far more likely to take out insurance to protect our television than our family’s quality of life.

In case life does throw you a curve ball, life insurance can significantly ease the burden.

What types of policies are available?

So what kind of cover is available? For expats living in the UAE, there are two main types of cover which pay out on the policyholder’s death – term and whole of life. There is also critical illness cover, which pays out in the event of the policyholder being diagnosed with certain conditions.

Term covers does exactly what it says on the tin: it covers you for a certain period of time and does nothing but pay out a lump sum on death during that period. This is frequently used as low-cost cover to protect specific liabilities, such as mortgages and loans, and as a cost-effective means to protect a family’s future lifestyle should the main breadwinner die.

Whole of life plans cover the life assured until death, whenever that occurs, and also include an investment element that builds a surrender value throughout the life of the plan.

This type of cover is frequently used as an effective means of mitigating expected inheritance tax liabilities on death.

Cancer is likely to affect a quarter of men and a fifth of women, and critical illness cover insures the policyholder against the diagnosis of one of a prescribed list of critical illnesses, such as cancer, heart attacks or stroke. Each insurance company has a different list of illnesses covered. The longer the list, the more expensive the policy tends to be.

Why should I take out cover?

There are various reasons why you should consider taking our some form of life insurance. By far and away the most important reason for taking out cover is that you have a family that depends on your earnings for their financial security and lifestyle.

Another reason for doing so is if you have specific financial liabilities, such as loans and mortgages, that you wouldn’t want to burden your survivors with if you were to die or that you’d like taken care of should you be diagnosed with a critical illness and be unable to work.

You should also think about cover if you have a significant inheritance liability that your estate will be liable for on your death and you would prefer to pass on all your wealth to your beneficiaries, or if you would prefer your executors not to have to liquidate your assets to pay a tax bill.

Don’t leave it to chance: insuring against the unexpected in this way can be relatively inexpensive, but can provide huge benefits.

Have you found this guidance useful? Have you protected your family from the unforeseen? Comment below...

Pic credit: digitalart/ FreeDigitalPhotos.net

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Chartered financial planner
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