20 Investments: Life Insurance
What Is It?
Life insurance is income protection in the event of your death. The person you name as your beneficiary will receive proceeds from an insurance company to offset the income lost as a result of your death. You can think of life insurance as a morbid form of gambling: if you lived longer than the insurance company expected you to, then you would "lose" the bet. But if you died early, then you would "win" because the insurance company would have to pay out your beneficiary.
Insurers (or underwriters) look carefully at decades worth of data to try to predict exactly how long you will live. Insurance underwriters classify individuals based on their height, weight, lifestyle (i.e. whether or not they smoke) and medical history (i.e. if they have had any serious health complications). All these variables will determine what rate class category a person fits into. This doesn't mean that smokers and people who've had serious health problems can't be insured, it just means they'll pay different premiums.
There are two very common kinds of life insurance: term life and permanent life. Term life insurance is usually for a relatively short period of time, whereas a permanent life policy is one that you pay into throughout your entire life. These payments are usually fixed from the time you purchase your policy. Basically, the younger you are when you sign-up for this type of insurance, the cheaper your monthly payments will be. (For an in-depth discussion of these two types of insurance, see Buying Life Insurance: Term versus Permanent.)
Objectives and Risks
No matter who you are, one benefit of life insurance is the peace of mind it gives you. If anything happens to you, your beneficiary will receive a check in a matter of days. Life insurance can also be used to cover any debts or liabilities you leave behind. The bank doesn't just write off your mortgage once you pass away - these payments must be made, or your house may be liquidated. Life insurance can also create an inheritance for your heirs, or it can be used to leave a legacy if it's put toward donations to charitable organizations.
Most life insurance policies carry relatively little risk because insurance companies are usually stable and heavily regulated by the government. In "cash value" policies you are allowed to invest your policy in stock, bond or money market funds. In these types of policies, the value of your insurance depends on the performance of those funds.
How To Buy or Sell It
There are thousands of insurance brokers and banks across North America. Keep in mind that you will usually have to pay a commission for the salesperson.
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