What is life insurance?
Here at Simply, we love a bit of pirate energy. We’re not, of course, saying we endorse wholesale theft and piracy. No, what we relate to is the pioneering spirit of those maritime renegades, their will to disrupt the status quo and challenge outdated systems*.
Of course, our aims are slightly different – pirates sought to liberate ships of their gold, while we’re trying to liberate people from poverty – but there are definite links. Pirating contributed to the growth of insurance as merchants sought to protect themselves from the risk of losing their goods to storms or marauding bands of buccaneers. This was part of the growth of short-term insurance. Have something of value that you are worried might be stolen or damaged? Short term insurance protects you against that type of loss by paying you out to an agreed value if something goes wrong. Though terms of the policy may vary broadly, the basic system is the same regardless of whether you are insuring your car, your household contents, your smart phone or your chest of Spanish gold bullion. Generally, this is concept is quite easy to grasp because we’re talking about tangible objects, but what about less tangible things, like a person’s life? What exactly is life insurance and how does it work?
Life insurance, or life cover, is a type of long-term insurance and ensures that a lump sum of money is paid out in the event of your death. To whom? Well, that’s the most important – and possibly obvious – distinction between insuring your things and insuring your life: when one of your valuables is lost or damaged the insurance is paid out to you, but when you pass away the funds are paid out to your beneficiaries (those people you’ve nominated to benefit from your life policy – usually family or loved ones).
That’s why life insurance is not usually a popular conversation topic: talking about your own death doesn’t come easy to most. And while that is understandably uncomfortable for some people to talk about, the truth is, what could be more valuable than your life?
We’re not talking here about the emotional value of your life to those who love you – nothing could ever replace that – we’re talking about the practical impact on those you leave behind should you pass on. The more people depend on you for care and protection, the harsher the financial impact on them when you are no longer around.
Life insurance essentially softens the economic blow of your death by providing for your loved ones when you die. In return for your payment of a monthly premium your life insurer promises to pay a cash sum to your beneficiaries upon your death - for them to use in any way they wish or need to.
But your life can also be insured in other ways. Disability cover, for example, pays out a lump sum of money – to you – in the event that you are critically injured and physically disabled. Another example is funeral cover – a very specific form of life insurance – that provides funds to pay only for your funeral, or the funeral of a loved one.
As interesting as that all may be, do you need life insurance? Well, the answer to that question varies significantly according to what stage of life you find yourself in and what your priorities are, something we explore in detail here. But, whether you’re a pirate or a parent, if you have someone in your life you love and care for, it’s an important question to ask.
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