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What is Life Insurance?

Video Transcript

Hey this is Chris with Money Burst, and in this video let's take a look at life insurance: what it is, and the different types available.

Life insurance is essentially a contract between you and an insurance company. The deal is, you pay a monthly fee which is called a premium, and in return the insurance company will provide a lump sum payment known as a 'death benefit' to your beneficiaries upon your death. It's kind of like a financial safety net that gives peace of mind to you and your family.

There are two primary types of life insurance: term life and whole life. Term life insurance covers you for a set period of time, for example 10 years or 30 years. It's pretty straightforward, more affordable, and usually fits most people's needs. Term life insurance is ideal during your working years or while you're paying off a mortgage. Whole life insurance on the other hand offers life-long coverage and comes with a cash value component which grows over time. However, it's almost always the more expensive option.

The choice depends on your needs. Term life insurance can be a good option if you need coverage for a specific period, while whole life can be suitable if you seek life-long coverage and an additional asset for your financial plan.

So how do you decide which one to choose? Term life is often the way to go. It's cost effective and pretty straightforward. It's easy to understand. It covers you during those years when your family depends on your income the most, and once kids are no longer relying on your income and you build up a bit of savings, you may no longer find the need to continue to make those premium payments. Whole life can be the right choice if you need that longer extended coverage and you have the budget for the higher premiums.