What is it?

Life insurance is income protection in case you pass away. The person you name as your beneficiary will receive proceeds from an insurance company to offset the lost income as a result of your death. You can think of life insurance as a very morbid way of gambling, if you live longer than the insurance company believed, you would "lose" the bet. But, if you die early then you "win" because the insurance company must pay out your beneficiary.

Insurers (or underwriters) look carefully at decades worth of data to try and predict exactly how long you will live for. Insurance underwriters classify individuals based on their height, weight, if you are a smoker, or if you have had any serious health complications. All these variables will determine what rate class category you fit under. Being a smoker or having had a serious health problem does not mean that you can not be insured, it just changes the premiums youll pay.

There are two very common kinds of life insurance, these are "Term Life" and "Permanent Life". Term life insurance is usually for a relatively short period of time, whereas a permanent life policy is one that you pay into throughout your entire life. These payments are usually fixed from the time that you purchased your policy. Basically the younger you sign-up for this type of insurance the cheaper your monthly payments are.

Objectives and Risks:

No matter who you are, one benefit of life insurance is the peace of mind that you get. If anything happens to you, the beneficiary will receive a check in a matter of days. Another reason is to cover any debts or liabilities you leave behind. The bank doesnt just write off your mortgage once you pass away, these payments must be made or your house may be liquidated. Life insurance can also create an inheritance for your heirs. Leaving a legacy by giving to charitable organizations are another good reason for life insurance.

Most life insurance policies carry relatively small risk because insurance companies are usually stable and are heavily regulated by government. In "cash value" policies you are allowed to invest your policy in stock, bond or money market funds. In these types of policies the value of your insurance depends on the performance of those funds.

How to Buy or Sell it:

There are thousands of insurance brokers and banks across North America. Keep in mind commission for the salesperson is often involved.

Strengths:
  • life insurance provides an excellent peace of mind in case you pass away suddenly.
  • life insurance policies are a relatively low risk investment.
Weaknesses:
  • if you live a long life then your family likely wont get the full value out of your policy.
  • cash value funds can fluctuate depending on what the financial markets are doing.