What is... | January 28, 2015

What is life insurance?

Life insurance can be a financial safety net that provides for dependents if you cannot. It gets a little more complicated when comparing different types – and when determining how much cover is needed.


Life insurance is a basic finance concept that it's important to understand.

Peace of mind
The sudden loss of a breadwinner can spell financial disaster for a family - particularly if there are mortgage payments to meet and other long-term commitments. An ING Be Good at Money video tells how, at a basic level, life insurance is a financial product that provides a lump-sum cash pay out (or regular payments) to the beneficiaries in the event the policy holder passes away unexpectedly.

How life insurance makes cents
Life insurance involves paying premiums in return for the cover. Because the number of people who end up claiming life insurance is less than the total number of policyholders, life insurance can be affordable for many people. Make sure to include these premiums in your budget. It can be helpful to think of life insurance as your second emergency fund.

I’ll take some life insurance with my mortgage
The timing and the level of cover will depend on individual circumstances. A person’s first life insurance policy will often coincide with a life-changing event that increases their financial responsibilities to others. The event might be marriage, taking out a mortgage, having a child or something else. Even once a policy has been taken out, it can pay to review needs every year as circumstances change – so, for example, coverage needs may drop if children have become financially independent or rise if the policyholder has taken on a bigger mortgage.

Insured for whole of life?
This video about different types of life insurance explains principles that underpin different types of cover. The first principle is duration: is cover needed for a set “term” or for “whole of life”. The exact definition and other terms and conditions will vary from country to country and potentially between companies. The second principle is adding an investment element. Sometimes known as an endowment policy, this type of life insurance is a savings plan that pays out a sum at the end and also pays out of the holder dies during the term. But remember: the more add-ons, the higher the premium usually is. Whatever product you choose, life insurance must suit your individual needs and circumstances. If you're unsure whether a product does, it might be wise to talk to a financial advisor.

We like to avoid loss and make things simple
ING senior economist Ian Bright blogged about factors that come into play when people make decisions about which insurances to buy. Bright explains that price is not the only driver – don't forget the natural impulse to limit losses and reduce complexity.

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eZonomics team
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