Business

Basics of life insurance

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There is no getting around death. You
will die. I will die. Most of the time, we hardly think about death. Usually
the idea of ​​our own mortality is forced into our minds when one of our loved
ones dies. It is normally a fleeting thought, replaced by real
responsibilities, work and more urgent commitments. But the reality is, we just
don’t like to think about death. Because the subject of life insurance forces
us to think about our death, so we don’t like to think about life insurance.
 
It
just isn’t fun to do. But, it is necessary to think about such insurance,
especially if you have a family that depends financially on you as the
breadwinner. Failure to take on this responsibility means you put your family
at risk of becoming destitute if the unthinkable happens. No matter how much we
want to avoid facing death, we just need to take our financial responsibilities
to those we leave behind.
 

Risks covered by life insurance

 
Life insurance can be used to protect
against many types of risks, both personal and professional, such as:
1. Ordinary life insurance – Proceeds
from an insurance policy used to replace loss of future personal income due to
premature death. The face amount (aka “amount of coverage”) required to meet
this need depends on several factors, including loss of income, monthly housing
costs, other available assets, and so on. A simplified approach, which gives
you a rough idea of ​​mandatory coverage, is to divide your annual earnings by
5%. For example, if your annual income is $ 50,000, you will need $ 1,000,000
of insurance coverage ($ 50,000 divided by 5% equals $ 1,000,000).
2. Life insurance buy-sell – Proceeds
from an insurance policy used to acquire a deceased partner’s interest in your
business. The face amount required to meet this need depends on the fair market
value of your business multiplied by your deceased partner’s interest in the
business. For example, if your business is worth $ 1,000,000 and there are two
partners, that requires insurance on each partner equal to $ 500,000. The
business can be the owner / beneficiary / payer of the premiums of the life
insurance policy or each partner can be the owner / beneficiary / payer of the
premiums.
3. Key Man Life Insurance – Proceeds
from an insurance policy used to secure the services of a deceased employee
with unique skills. The company is the beneficiary of the plan and therefore
pays the premiums for the insurance policy. Key person insurance is necessary
if the sudden loss of a key executive would have a material adverse effect on
the business of the business. The payment provided upon the death of the leader
essentially allows the company to find a new person or to implement other
strategies to save the company.
4. Second Death Life Insurance – This
is an insurance policy that insures two lives (you and your spouse). If the
last deceased spouse has a taxable estate, the proceeds of this insurance
policy will be used to pay federal and state estate tax. For example, if the
future estate is expected to generate an estate tax of $ 1,000,000, you would
want face amount equal to that amount. This ensures that your heirs receive
every dollar from your estate.
5. Estate Transfer Life Insurance –
Proceeds from this type of insurance policy are used to leave a bequest to a
charity of your choice.
 

Types of life insurance policies

 
1. Term life insurance – Term life is
“term” insurance. It only provides for pure annual coverage (no
investment component as in other types of policies). On the death of the
insured, he pays the insured capital of the policy to the designated
beneficiary. The younger you are, the cheaper the term premiums. On the death
of the insured, he pays the insured capital of the policy to the designated
beneficiary.
2. Whole Life Insurance – Whole life
insurance provides “permanent” insurance coverage and allows you to create a
near-retirement investment account that is tax-sheltered. This policy will
remain in effect for your entire life as long as you make the required premium
payments. It is more expensive because part of your premium is used to create
an investment asset called a cash value. This cash value accumulates tax-free,
unless you cancel the contract before death.
3. Universal life insurance –
Universal life is another type of “permanent” insurance. Universal is more
flexible than Whole-Life, offering permanent insurance protection at low cost
as well as a savings component that, like whole life insurance, is invested to
provide an increase in cash value. The death benefit, savings component and
premiums can be reviewed and changed as a policyholder’s circumstances change.
4. Variable life insurance – Variable
life is similar to universal life insurance, except that it offers a wider
choice of investments.
 
To sum up, four basic principles
should be considered when valuing life insurance:
1. Determine your needs.
2. Understand the different types of
policies available.
3. Determine which policy best meets
your needs.
4. Review your insurance as your
needs change.
5. Select a professional specializing
in life insurance.
Tom is a Chartered Public Accountant,
Chartered Financial Planner, Certified Long-Term Care (CLTC), and President of
Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works
with clients to help them manage their money, planning for retirement, college
savings, life insurance needs, IRAs, and qualified plan transfers with the goal
of maximizing tax benefits and minimize taxes. Tom is founder of the Rich
Habits Institute and author of “Rich Habits”.
 

I will give you an example
of the basics of life insurance in Australia

 
Life insurance began in Australia in
1833 when the company issued a policy to Joseph Tice Gellibrand. Gellibrand
died four years later, so his policy was also the first paid claim. This
company still exists today as an Australian insurance provider.
In 1849, a not-for-profit insurer was
formed, which then expanded its scope to include banking, managed funds, and
other financial and investment services. Their name changed was eventually
listed on the stock exchange.
 
Another large insurance company
started as an insurer in 1914. Unlike the first two companies, they started
with workers’ compensation services. Currently, they offer several types of
financial protection services, including life, home and auto insurance.
As times have changed, more and more
insurance companies have sprung up in Australia. They are now available to
provide insurance quotes online and no longer require the insured to come to
the office. The types of insurance plans have also changed over the years.
There are more options now than in the past, so customers can choose more
suitable life coverage.
 

Current policies

 
These companies, along with many
others in Australia, offer several main types of financial insurance packages. Term
life insurance is the most basic and oldest form. In exchange for fixed
payments, the policyholder has the guarantee that in the event of death or
diagnosis of a terminal illness during the term of the contract, his
beneficiary will receive a fixed amount. The main use of this type of policy is
to cover funeral costs and other costs related to death.
Rather, total permanent disability
insurance (TPD) offers protection in the event of permanent and total
disability of the policyholder. This policy differs from the first in that it
is not limited to a fixed term but applies for the rest of the life of the
insured. The main utility of this policy is to provide financial stability to
both the policyholder and his family and dependents in the event that he is no
longer able to work.
A similar policy offered by life
insurers in Australia is income protection insurance. Typically, this type of
policy offers a guarantee of up to 75% of a policyholder’s monthly income if
they are unable to work due to documented illness or injury.

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