In the article, Why You Need Life Insurance, we concluded by affirming that Life insurance exists to take care of the risk of someone dying too young, someone living so long, someone becoming disabled, and someone requiring future cash sum. These are solid facts about life insurance. But it will be nice to be more specific about those stunning benefits that life insurance can provide. This post explains.
1. Income replacement
In the event of death of the insured person – who is usually the breadwinner – the life insurance payment serves as a replacement of his income for the benefit of his dependants. This becomes much more essential where the deceased (i.e. the policyholder) leaves a young family behind.
It is often joked that people, particularly Africans, cry and wail at the time of death of their beloved breadwinner not so much because of his death, but much more because of the financial disaster that his exit would bring to them. With a good life insurance policy in place, the financial sorrow will definitely be minimized, if not completely eliminated, as the dependants would still be able to maintain the same standard of living they have become used to.
2. Burial Cost
In the advanced countries, burial and funeral cost can, indeed, be quite burdensome for dependants. Think about the cost of coffin, payment to funeral house, estate administration costs, medical bills etc. Such financial burden can constitute a hitch on the dependants’ budgets.
When it comes to our case in Africa, particularly West Africa, the story becomes bigger. In this part of the world, death is celebrated; most especially if the deceased person died at old age. It is quite common to find announcements such as “A Celebration of Life” or “Felicitation” in the print media when the family is announcing the burial arrangement for such departed souls. These kinds of announcements are simply invitations to merriment. The burial ceremony could span a period of three consecutive days with different kinds of parties. Of course, such social gatherings don’t come cheap. Many people take loans for burial purposes to ensure that they are not “disgraced.”
The money paid by the life insurance office at death of the policyholder can be used to take care of all these self-imposed but culturally accepted financial burdens. Many insurance companies have recognized this peculiar need so they’ve designed specialized Funeral Expenses products to fit the purpose.
3. Creation of immediate estate
This is closely related to (1) above but it is quite different. While the first point above concerns replacement of income, creation of an estate through life insurance has to do with leaving an inheritance for the dependants. Just as one can leave a house, a company, a car etc for the family, so also can one create an immediate inheritance for them by purchasing a life insurance policy and naming them as the beneficiaries.
I like explaining this point by using the hypothetical case of Mr. Andrew who walks up to a life insurance company, buys a life insurance policy of $50,000 sum assured, pays a single premium of, say $1,500, obtains his policy document, and walks out. Through this singular act, he immediately creates an inheritance of $50,000. Should Mr. Andrew die the next hour, say of motor accident, the beneficiary becomes entitled to $50,000. What a better way to make financial provisions for the family. Remember, Late Andrew only paid $1,500. That is the beauty of life insurance for you!
Did I hear someone shout, “Gambling?” No way! See Why Insurance is not Gambling. The two are different.
4. Tax burdens.
Dead people do “pay” tax. The only difference is that the burden of payment is heaped on the heads of their dependants. These taxes are usually referred to as “death” taxes and they become payable on the property that a deceased person has left behind. Readers from the advanced world will be quite familiar with these kinds of taxes, but they may appear rather strange to those who are in the less developed countries where tax laws are not so stringent.
When a man dies, his estate is made to pay certain taxes. This could lead to a situation where the heirs must sell part of the inherited assets to enable them pay the required taxes. The life insurance money can be utilized for the payment of such estate taxes so that the dependants wouldn’t have to dispose some assets or take a smaller inheritance.
Life insurance policy serves as a benevolent way of making charitable contributions. For instance, instead of our Mr. Andrew donating just $1,500 to charity, he could so arrange it that the $50,000 insurance benefits would be paid to charity in the event of his death. The effect of this is that a much larger amount is made available to charity by way of his life insurance cover.
6. Savings and Investment
Savings and investment is a key part of life insurance. Many life insurance products can be regarded as vehicles for people to make “forced” savings because of the need for them as policyholders to continue to pay their premiums. Stringent conditions exist on such policies to discourage discontinuation of premium payments, but the policyholders can have access to some cash payments after a period of time. These cash values can be used to meet certain urgent needs. In addition, the interests credited to such policies are, in most cases, exempt from tax and, in a number of countries, the benefits paid at death are not taxed.
Life insurance therefore serves as a committed way of saving towards the future for various purposes such as retirement, house purchase, business establishment, wedding ceremony, education etc.
Finally, life insurance plays a major part in the development of a society. Apart from the fact that it enriches the life of people through the benefits highlighted above, life insurance companies accumulate huge funds which are duly invested in the economy. The premiums collected from policyholders build up to huge funds that are used for various developmental purposes which impact positively on the lives of the people. Examples include provision of infrastructure, establishment of industries, creation of employment opportunities etc.