Term Life Insurance – A Beacon of Hope for Your Loved Ones
written by Cai Junhao, ChFC, CJHFinance.com, published on: 4 December 2015
When a person unexpectedly passes away, it is not the loss of only one life.
It is the loss of a loving spouse to a widow or widower, with whom they spend their lives together as one.
It is the loss of a caring parent to a child, who undoubtedly is the greatest person in the world.
It is a loss of a filial child to the parents, who have lost someone who means everything to them.
On top of the emotional losses, a family often also suffers from various forms of financial losses.
Livelihood of Family
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The passing of a sole or primary breadwinner in the family will cause financial hardship to the survivors, especially if young children is in the picture. The surviving spouse would not only have to go out and work to make money, but also to shoulder the financial responsibilities of the deceased spouse. Working full-time also means less time with children and be with them throughout their growing up years.
Most families today are making dual incomes, and peg their lifestyles to their combined income. They are accustomed to a more costly way of living, such as a living in a bigger or even private property, owning a car, having a domestic helper, sending their children to childcare centres, dining at restaurants and having annual overseas trips. When one half of the couple passes away, a significant income stream is lost.
Surviving spouses are often overwhelmed by the challenges of replacing their partner’s income stream. There are two tough choices to make; to work doubly hard and make 2 persons’ income (which is not always possible), or drastically reduce their standard of living. They would have to downsize to a smaller home, or perhaps even rent. They might have to sell off their car. Overseas trips become luxuries of the past, and dining at restaurants only happens on birthdays and special occasions.
Whether it is a single-income or dual-income family, it is inevitable that the surviving spouse will grow old, and the children will leave the nest to start their own families. Will the survivor have enough retirement funds to be able to live in comfort, without having to work for measly wages in the old age? Will he or she age gracefully and retire with dignity, or be forced to do jobs that nobody wishes for? Did the deceased leave behind a path of comfort and security, or a trail of burdens and difficulties?
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A parent’s greatest gift to a child is the gift of education. With sound education, children can have the strong foundation to build their future upon. Yet, many whom I have met do not factor in the cost of tertiary education into their insurance portfolios. Most think of it as something that can be addressed in the future, when their children are closer to university age. However, the sudden passing of one of the parents could mean that the income stream that could have been used in education funding is now dried up.
With the cost of education rising at a rate higher than general inflation rate, we project that in 20 years’ time, the tuition fees for a 4-year business degree course could amount to about $80,000 to $100,000. How would a widow or widower be able to single-handedly muster up this significant amount while trying to juggle everything else?
Taking Care of Aged Parents
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Beside the responsibility of being a spouse and a parent, many of us also bear the responsibility of being a child who is taking care of elderly parents who are financially dependent. Should we be gone before our parents, their welfare and financial security suddenly gets thrown into jeopardy. It is impossible to predict when a disease or accident may occur, and cut short our time in this world. How could we ensure that our parents can live their golden years in peace and comfort after toiling for so long trying to raise us up?
Disability — Worse Than Death
It is often said that a lifelong disability is worse than death. Not only does a disabled person loses the capacity to work and make a living, medical bills can skyrocket and living expenses still go on for a very long time. This would cause a financial burden to the people around them.
Undoubtedly a disability will greatly affect people with their own families. However singles are not spared from it as well. A married couple may still have each other to depend on when one of them become disabled. Singles can probably only rely on their own savings, which is a finite amount. How can one be protected from this fate that is financially worse than death?
How Term Life Insurance Works
How Term life insurance works
Term life insurance is the simplest form of personal insurance that provides financial security for the above scenarios. As its name suggests, this form of insurance provides coverage in the event of death for a specific “term” or period. The job of a term life insurance is very simple: it pays out the stipulated amount of money when the insured person passes away within the duration of the policy, in exchange for a relatively low amount of premium. Additional benefits or “riders” may be added on to the policy to expand its scope of coverage to include disability or major illnesses.
There are no cash values to talk about, nor investment returns to be concerned with. Term life insurance is straightforward: pay premiums for coverage; stop paying premiums and coverage lapses.
When compared to a whole of life insurance, premiums for term life insurance can be as low as one-fifth of the cost of a whole-life policy. This is due to the fact that there is no “savings” component that is a feature of a whole-life policy. Also, the insurer is almost guaranteed to pay out a death benefit on a whole-life policy, as it practically covers the insured person for life. Whereas for a term life policy, there is a chance that the insured survives beyond the expiry of the policy.
Reasons for Choosing Term Life Insurance
Term life insurance policies are prescribed for individuals with large financial obligations for a specific period of time. Here are some of the financial commitments that term life insurance can help meet, should one passes away or become disabled:
• Clearing outstanding loans (such as mortgage or car loans)
• Providing money to support young children
• Providing money for children’s tertiary education
• Providing money to support aged parents
• Providing money to support spouse
• Replacing loss of future income due to disability
• Preventing premature liquidation of assets and investments
A person’s required amount of insurance cover do not stay constant – it changes as our life changes. Insurance needs rise as we take on more responsibilities, and falls as we are relieved of our obligations. As our wealth increases, the reliance on insurance protection also drops. Therefore term life insurance is an ideal way to provide the much needed cover until those obligations are fulfilled, as most of them don’t last forever.
It is typically better to have a term life insurance that covers $1 million to the age of 65, than to have a cover of $200,000 for whole life. In fact they may cost about the same. However the usefulness and application are vastly different.
Between the age of 30 to 65, most people take on the most financial commitments in their lives, such as owning a car, owning a house, having children, taking care of parents, and also to save up for our retirement. This is also the period where we are the economically productive, yet most financially vulnerable. Simply said, nothing must go wrong during this critical 35 years.
After 65, the mortgage, which is the largest debt for most people, is usually fully repaid. Children are now independent. Our parents might have left this world. And we should have a decent amount of retirement funds built up while we worked over the past four decades. Our financial obligations have gone down, and so do our required insurance cover.
Term life insurance does a wonderful job of providing a high level of cover for our most financially vulnerable times with at low cost, which also frees up excess funds for us to save and invest for our retirement.
Most importantly, it provides a blanket of financial security for your loved ones, and buys you a peace of mind so that you can focus on the most important aspects in your life — your family, your career, your time in this world.