What is life insurance?

Why is it that most people can justify a flutter on the horses but resent paying life insurance premiums?

Maybe they don't really understand what is life insurance.

Life insurance provides a financial benefit to a beneficiary chosen by the insured on the event of the insured's passing/ death/ demise. The beneficiary can be a person(s) (e.g., the insured's family), an organisation (e.g., the Society for the Prevention of Cruelty to Animals), or the provider of a service to the insured (e.g., for funeral expenses, outstanding debt, etc.). A beneficiary can be pretty much anyone/ anything as long as it's not illegal.

You buy a life insurance, or life assurance policy, by paying a lump sum and/ or regular payments into the policy. It doesn't matter whether it is a term insurance policy, annuity or endowment, taken out to cover your life, your home loan or serious illness.

Insurance detractors complain that "insurance of any kind is a con game where you are forced to bet against yourself, knowing that you are going to lose money." Shotsacrossthebow.com is a web site that contends insurance is a scam. The blogger argues succinctly and logically that "for an insurance company to make a profit, it must take in more money than it pays out. For this to happen, on average each customer must pay more for his policy than he gets back in benefits. All the talk of 'cost sharing' and 'spreading the risk' is a smoke screen; the bottom line is that when we buy insurance, we pay more than we get back."

No doubt this is true. However, it is peace of mind regarding the future risk of something happening to you, like death or disability, that motivates people to take out life insurance. As the above blogger notes, on average each client pays more than he benefits; but what if you're the 40-something high-flyer who meets an untimely end leaving behind a widow and three children with an expensive lifestyle and paralysing outstanding debt? I'm sure you'd be glad at that stage to reap the benefits of your (with hindsight) meager premiums, even if your neighbour actually lost out on the same scale of risk vis a vis his premiums. Well, your widow will and, while you're alive and if you're a conscientious family man, you'll have peace of mind.

Nobody puts a gun to your head to take out life insurance, but what if ... ?

The housekeeper says to her Ma'am: "We're out of sugar." Exasperated, Ma'am wants to know why she wasn't informed of the grocery shortage yesterday when she did the shopping. "There was sugar in the kannetjie yesterday," replies the housekeeper.

In other words, in life we have to plan for possibilities as well as probabilities to cover risk and give us security and peace of mind. You can take a second job when costs go up but death and disability are states of being you are unable to work around.

If you're really disciplined, a good business person and have great investment savvy (or are lucky) you can create your own life insurance fund by putting aside money for a rainy day; in fact for the last rainy day of your life. That will work if you don't cheat and never withdraw from your savings with a promise to replace the money tomorrow (when we all know tomorrow never comes).

The fact is, to cover yourself through your retirement alone, assuming you or your nearest and dearest are never confronted with disaster if you are disabled or die, you will need to save one quarter of your gross income every month between the age of 25 and retirement.

It's a natural instinct for humans to try and anticipate the future and provide for it. In South Africa, stokvels provide an alternative to formal life insurance and other insurance policies. Members contribute a specified monthly sum to the stokvel. At specified times each member receives all the premiums in a lump sum. Some stokvels only pay out a specified amount or, as does formal insurance, under specified circumstances or on the death of a member.

By the way, if you're not convinced and own a business or aspire to do so, think about this: do you pass your salary requirements onto your customers by increasing the cost of the product or service you provide to them?