Assignment 3 Life Insurance

Assignment 3:

Life Insurance is a mandatory life policy that one needs to procure. It can be defined as a contract between an insurance policy holder (the insured) and the insurance company (insurer), where the insurer undertakes to pay a sum of money plus the interest accrued to the insured’s beneficiaries upon their death, in exchange for premiums. This article will discuss the life policy with specific reference to endowments, disability insurance, retirement annuities and income protection.

Life Policy:

The life insurance policy certifies that one’s dependents are financially secure in the event of the insured’s death or disability. The life policy substitutes the insured’s income with a lump sum, enabling the dependents of the insured

For example, if one needs to recover from surgery and is not able to work for weeks or a few months, the disability insurance will kick in and pay the insured a monthly income replacement.

After 6 months, the short-term insurance coverage will expire and thereafter one will need long-term disability insurance cover, if they are still unable to work. Long-term disability insurance will cover around 60% of one’s income. This coverage can last for years or up to the age of 65, if not their entire life, depending on the policy. The coverage will end once the insured returns to work. For example, if the insured undergoes a surgery to remove a tumour and cannot work for 9 months, long-term insurance will kick in after 6 months, thus it is also crucial to have short-term disability insurance.

The benefits of disability insurance include the protection of the insured’s income to pay for monthly bills, dependents’ expenses, daily necessities and evade unsolicited situations such as bankruptcy, in the event that the insured is unable to work.

Income

When the policyholder cashes out, they will receive a lump sum or fixed payments for a specific length of time or the rest of their life and these amounts are tax deductible.

The benefits of a retirement annuity include having a secure income to lead the same standard of life, once the insured has retired. The money invested in the annuity is tax-free with no capital gains or income tax on the insured’s investment returns. The amount invested is compounded annually with substantial long-term growth. This insured is able to save in a controlled manner as one cannot access this annuity until the stipulated age of retirement or death, where the annuity will pay out the funds and provide an income to their dependents.

A retirement annuity is distinct from a pension fund as one does not need to invest a fixed portion of their salary, but rather a flexible and more affordable amount that one chooses. The policyholder can choose their fundamental investment and the allocated amounts with a diversified portfolio, whether it be offshore, bonds or