What is Life Insurance? Do I need one? (什么是人寿保险？我需要吗？)
What is life insurance? I understand this may be a unfamiliar term to some people or even a heavy topic to discuss. Especially for traditional Asian family I grew up in, life insurance has been the topic they ran way from. (*My grandparents and relatives don't like to talk about death.)
Basically, Life Insurance is an "exchange" of your "risk" in the event of your "death" with the insurance company for a "payout" or "benefit".
Knock on wood, in the event of your death, the insurance company pays a large sum of money to your loved ones, thus helping them "financially" into the future.
**There are two types of Insurance**
1.Term Insurance: This is basically like a coupon.
Good for a certain "period", you can lock in your "rate" for 10 years, 20 years or 30 years. We call this "Yearly Renewable Term". You can pay monthly or yearly depending on your budget.
10 Years renewable for example, you might be quoted to pay $30/month or $360/year every year for the next 10 years, with a "death benefit" or "payout" of $500,000 dollars.
What happens after 10 years? You get a new rate! Because you signed up for the 10 year term, every 10 years the "premium" you pay changes.
What about 30 year term? Well, you will pay the same premium for the next 30 years, and when times up, you get a new "rate" or "premium" to pay depending on your age.
All death benefits are "tax free" by the way!
**That's the basic of Term Insurance** We won't go into a long winded essay just yet
2. The second type of Life insurance is "Whole Life Participating Insurance". This is basically Life Insurance + Investment.
a. Now, notice the word "Whole Life", usually means up to age 100. This insurance will bascially cover your life up to 100 years old.
b. It Grows! Because its an investment that grows over time, the longer you live, the larger the "death benefit" or "payout" amount it's going to be. Why? because the dividend the investment makes, is used to purchase "paid up addition" or simply, lets buy more life insurance with the dividend earned. So as the years go by, you will see your death benefit increase.
c. Premium/Price - Now, because its a life insurance+investment, the insurance company will need to help you invest the money into a "portfolio", meaning a combination of equity, cash account, capital markets and such for it to grow.
**Note: usually the "premium" or "price" you pay may be 10x to 20x bigger than your Term Insurance because this is a long term investment product that DOES take "time" and "capital" to grow. (So comparing with Term Insurance, I mean, It's kind of hard to invest with $30/month or $360/year, even at a rate of return of 10%/year, it only grows $36/year...)
d. Tax Free Death Benefit
**If you would like more details of how it works, I am more than happy to discussed in person, email or over the phone**
Let's get back to it.
Does it really scares people that much????
Let's think about it in a new perspective with an example to make things easier.
Ex. Mr.Smith is married with his significant other and 2 kids. He is a full time wood worker and makes $80,000 per year. Mr.Smith is the sole income earner in his family while his significant other stays home to take care of the kids (also a very important role).
One day while working on the job, Mr.Smith got into an accident, a large pile of wood fell over his head and unfortunately he did not make it.
In this example, let's take a look at the "financial“ perspective of what will happen to his significant other and the 2 kids at home.
Without life insurance:
Annual Income $80,000 is gone
Family will need to rely on savings to buy grocery, if they have any, AND for how long
If the family does not have any savings, wife will need to sell the home, the car and anything valuable to support grocery and the 2 kids
If the family is renting, who will be making the money to pay the rent?
What if the family only has 3 months of savings for rent and grocery, no valuable things to sell, next comes to worse, wife will need to ask her parents and friends for money.
So you see, the situation becomes very difficult and very quickly.
Say, Mr.Smith makes $80,000 per year. And have Term Insurance in place, with a death benefit of $800,000 (knock on wood) should anything happen to him. His family will be paid $800,000. What that does for his significant other and the 2 kids is unquestionable.
With life Insurance:
$800,000 is "tax free"
Wife may use this money however she likes, for example, open Registered Education Savings Account for the kids (save money for the kids university fund in the future) or buy insurance for herself and for the kids (scenrio can be vice versa for Mr.Smith)
Payout the Mortgage
Pay Car Lease or Car Loan
Pay for School
So there you have it, the basics.
Hope it wasn't too long, and thank you for reading my blog.
Today is 2020-November-09, Vancouver and Fraser Valley is under a Covid-19 Lock down for 2 weeks again. Stay safe and stay healthy!