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Life Insurance

You have probably heard the expression that only two things in life are certain: death and taxes. That’s very true, and it is interesting that the first can trigger a huge bill from the second. One of the purposes of life insurance is so that your estate can pay any outstanding amounts to the Receiver when you die. But that is one of just many areas where life insurance can be a boon for those left behind.

The vexed question is: how much life insurance do I need? In the old days the folk used to say, “Your life insurance policy should just cover what you owe – no more and no less.” That is pretty true, and even if it is simplistic, that basis is a good place to start when considering your life insurance needs.

Certainly when you die (even if it was expected, such as after a long illness or extreme old age) there are going to be certain amounts owing which the estate will have to pay. Cash in the bank or tangible property that can be disposed of could cover these eventualities, but life insurance makes absolutely certain of this – and in most cases there is an excess paid out so that the beneficiaries of the estate also stand to benefit. Here is a list of the immediate expenses that might be outstanding when you die:

  • Home loan or rent
  • Car payments
  • Medical bills
  • Store accounts
  • Rates and taxes
  • Lights and water
  • Hire purchase contracts
  • School fees
  • Other miscellaneous accounts

But that is not quite the end of the story. There is also the aspect of taking out life insurance in the interests of the living spouse remaining. You may need to make sure that your spouse is able to carry on and raise children after you, the breadwinner, have died. That is a major application of life insurance, though it hardly qualifies as an unpaid bill! And yet what you are doing are “paying the bill” for all the pay packets you will be unable to bring home after your death.

The event of death itself results in certain expenses too. There is the funeral (some people rely on a funeral policy for this but there is no reason why life insurance should not cover this), death taxes and attorneys’ fees. Even the handling of the estate by the executor has a financial component, which erodes the core value of the estate. This should also be taken into account when deciding what amount of life insurance to purchase.

Despite the old folks’ adage that you should only buy life insurance for the amount you expect to owe when you die and to look after a remaining spouse, the fact of the matter is that there is a sentimental component to much life insurance too. Perhaps you have children or grandchildren that you would like to help through life (education, starting a business, buying a house) should you die. Or perhaps you want to make sure a loyal worker or even a favourite pet is looked after forever.

If you buy life insurance to cover these kinds of situations, then obviously this is different from buying life insurance just to pay outstanding bills. And yet it is quite a valid approach. Many grandparents these days, realizing how expensive it will be for their grandchildren to go to university when they reach that age, deliberately take out life insurance in order to be able to leave the child a substantial amount of cash when they die. Obviously, in cases like this, the grandchild has to be made a beneficiary in the will so that he or she gets the benefit of the life insurance amount paid out to the estate.