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Usually, the first experience people have with life insurance is when they take out a substantial loan (e.g. a mortgage) and the bank requires them to have it to ensure that if anything happens to that person, the loan will still be paid off. Unfortunately, the loan is often as far as the conversation goes.
Life insurance is a contract between you (the policy owner) and the insurer. This contract states that when you die, the insurer will pay a lump sum to the designated beneficiary. In exchange, you will pay the insurer a small sum on a regular basis (premium).
This is a great way to protect your loved ones if something were to happen to you, either today (or hopefully) in a few decades down the track. Life insurance gives you peace of mind by knowing that you’ve taken any financial burden away from your loved ones. Additionally, and many providers have the option to pay out early if you are diagnosed with a terminal illness – this is called a terminal illness benefit and it gives you the opportunity to use the money the way you want.
So that’s how it works – but why do I need it?
As I’ve said, it’s necessary when you borrow money from the bank for not only house purchase, but other debt such as personal loans, credit cards, HPs – it’s logical to protect your loved ones from having to pay these off if you were to pass away. But more importantly, it’s a type of income replacement. If you were to pass away, your income has stopped forever. Therefore, those who have relied on you – your partner, your children, your parents – are suddenly faced with the financial burden of replacing that money. Life insurance solves that problem – it means that if something happens to you, your partner doesn’t have to return to work immediately or worry about the next bill or childcare expenses.
So why get life insurance?