Sung-Yen Sammy Tsai
What is Life Insurance? Do I need one?
Updated: Dec 1, 2021
Life Insurance is an "exchange" of your "risk" in the event of your "death" with the insurance company for a "payout" or "death benefit". But now a days, it's no longer just about death benefits but also retirement planning, especially when you have something like participating whole life insurance.
Let's discuss the 2 types of life insurance:
**There are two types of Insurance**
Also called Yearly Renewable Term, YRT.
You can pay monthly or yearly depending on your budget.
The maximum length you can buy for YRT is 30 years, this means you get to lock your rate for the next 30 years.
What if you buy a 10 year contract? After 10 years, your new age is assessed and a new cost to renew will be presented to you.
You can convert your insured term insurance amount to whole life/participating life insurance without medical questionaire.
All death benefits are "tax free"
2. The second type of Life insurance is "Whole Life Participating Insurance". This is Term Life Insurance + Investment.
a. Now, notice the word "Whole Life", this insurance will cover you for your entire life.
b. Potential for growth, because its an investment, the longer you live, the larger the "death benefit" or "payout" amount it's going to be. Your participating life insurance earns dividends from the investment and can be used to purchase "paid up addition" or simply put, buy more life insurance with the dividend earned. So as the years go by, you will see your death benefit increase.
c. Premium/Price - 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, and capital markets for it to grow.
**Note: usually the "premium" or "price" you pay is higher than your Term Insurance because this is a long term investment product that takes "time" and "capital" to grow.
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 take a look at a scenerio:
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 perished
Wife will need to rely on savings to buy grocery
If wife does not have any savings, she might need to start selling her home, her car and anything valuable to support grocery and the 2 kids
If they are renting, who will be making the money to pay the rent while taking care of the kids
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 financial situation becomes very wary quickly.
Say, Mr.Smith makes $80,000 per year. And have Term Insurance in place, with a death benefit of $800,000. His family will be paid $800,000. What that does to help his wife and kids for the next 10 years is unquestionable.
With all life Insurance death benefits payout:
$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
I hope this is informative, should you have any questions please don't hesistate to contact me.