The life insurance provides financial protection if an unforeseen event happens to you and will ensure your family does not experience financial difficulty due to your loss. Despite the
emphasis placed on saving for retirement and investing in real estate, many individuals overlook the importance of having a life insurance policy or fail to understand how it works.
This comprehensive guide will guide
you through the following topics: The definition of life insurance, How Insurance Works, Different Types of Life Insurance, Life Insurance Benefits, Choosing the Right Life Insurance Policy, Common Mistakes to Avoid.
What Is Life Insurance?
A life insurance policy is an agreement between the insurance company and the policyholder (the person who purchased the policy). The policyholder will pay a certain amount of money (a premium) on a regular basis (monthly or annually), and the
insurance company will pay a stated amount o
f money (the death benefit) to the named beneficiary(ies), if the policyholder dies during the life of the policy.
The primary purpose of life insurance is to provide financial assistance to the following people:
Your husband/wife
Your children
Your parents
Your business partners
Those who rely on your financial support
Knowing that your family will be able to continue meeting their financial obligations (pay bills and debts, and purchase
daily items) after you have passed on may give you the peace of mind to purchase life insurance coverage.
How Life Insurance Works
Life insurance is a fairly straightforward concept:
Apply
Determine your premium based on the age, health, income, and lifestyle of the insured.
Begin paying premiums either monthly or annually
If something should happen before completing all payments of the policy, the beneficiary will receive the payment of the face amount of the policy.
The policy may lapse if ongoing premium payments are not made and the policy will not pay out if the policy has lapsed.
Why Life Insurance Is Important
The major benefits of life insurance include:
Financial Protection for Your Family: Here are some of the areas your family could use life insurance to provide financial security upon your death: rent or mortgage payments; payment of school tuition; payment of medical expenses; and payment of other day-to-day living expenses
Covers Your Debts so Your Family Isn’t
Responsible for Paying Them Off: If you have any kind of debt (such as loans or credit cards, and/or mortgage), life insurance will help provide for your family’s payment of any debts that you had outstanding at the time of death.
Replace Your Income for Your Family
: If you are the primary wage earner, your family will be relying on your wages for support. Life insurance will provide sufficient funds to support your family for a period of time after your death.
Provide Funds for Funeral Expenses: The cost of a funeral can
Types of Life Insurance
Term Life Insurance is one of two types of life insurance available today, the other being permanent life insurance.
1) What Is Term Life Insurance?
Term life insurance provides an insurance policy for a set number of years, such as 10, 20 or 30 year policies.
If you die while you have your term coverage (within that time period), your beneficiary will receive the amount of money you purchased. If you live past the expiration date of your coverage, the policy will be over and will not pay out anything.
Pros/Cons:
- Lower Cost
- Simplicity of Structure
- Good when you have young children/young family
- No cash value
- Coverage will expire when the term ends
Term insurance is best for anyone looking for temporary, affordable protection until their child(ren) reaches adulthood.
. Whole Life Insurance
As long as policyholders continue to pay premiums,
whole life insurance offers long-term protection.
In addition to providing protection, the policy will accumulate cash value (savings) over time, which can be used for loans.
Pros of Whole Life Insurance:
Lifetime protection
Savings accumulation
Fixed premium
Cons of Whole Life Insurance:
Higher cost
Greater complexity
.
Universal Life Insurance
Universal life insurance is a form of permanent insurance that gives you flexibility in adjusting your premium and the death benefit amounts according to certain limits. This product also has an added cash value component, which increases based on interest rates.
Variable Life Insurance- This type of insurance
permits you to invest a portion of your premiums into mutual fund accounts containing a variety of investment vehicles. The cash value of your policy and any death benefit could be affected positively or
negatively depending upon the performance of the underlying investments. While variable life policies tend to have a greater degree of investment risk, they also have the potential for greater returns than universal policies.
How Much Life Insurance Do You Need?
Your unique situation will help determine the total amount you need. Coverage equals 10 to 15 times your yearly salary will be the amount most experts would say you need to purchase. However,
you should also take into consideration:
your current debts; your children’s education expenses; your family’s monthly cost of living; any future expected expenses.
As an example, if your yearly salary is $10,000 and you want coverage for 10 years of income, then it will be necessary for you to carry at least $100,000 in protection.
Factors That Affect Premium Cost
The insurance company takes multiple factors into consideration when determining your premium such as:
Your Age
Typically, younger people are charged a lower amount for Life Insurance.
Your Health
Having medical conditions will raise the amount of money that you pay for insurance coverage.
Your Lifestyle
If you are a smoker, drink alcohol or have an occupation that is considered high risk, you will pay more for your Life Insurance than someone who does not.
Your Gender
On average, women have a longer life expectancy than men which results in women typically paying less than men for Life Insurance.
The Amount of Coverage
The more coverage you have, the higher the amount of money that you will pay for Life Insurance.
The Application Process
The insurance company takes multiple factors into consideration when determining your premium such as:
Your Age
Typically, younger people are charged a lower amount for Life Insurance.
Your Health
Having medical conditions will raise the amount of money that you pay for insurance coverage.
Your Lifestyle
If you are a smoker, drink alcohol or have an occupation that is considered high risk, you will pay more for your Life Insurance than someone who does not.
Your Gender
On average, women have a longer life expectancy than men which results in women typically paying less than men for Life Insurance.
The Amount of Coverage
The more coverage you have, the higher the amount of money that you will pay for Life Insurance.
Life Insurance for Different Groups
1.) Parents
Parents require Life Insurance to guarantee a child’s future
2) Married Couples
Life Insurance provides assurance of financial security for their spouse’s remaining partner
3) Business Owners
Policies provide protection to both business partners and employees
4.) Younger Adults – Purchasing insurance when you are younger allows for lower premiums
5.) Seniors
Some businesses provide limited insurance coverage to cover costs of burial or cremation services.
Common Life Insurance Mistakes
Procrastinating on purchasing Life Insurance
Limited Policies being purchased
Base Decisions on Individual Preference vs Looking at Multiple Companies
Letting Policy Expire
Failure to Update Beneficiaries
Savings vs Life Insurance
Some may feel you can save for a rainy day. However:
Savings may not be sufficient.
Death does occur at the most unexpected time.
A Life Insurance Policy allows for a small monthly premium and large benefit payout immediately.
Choosing the Right Insurance Company
Be mindful of the following elements when choosing an insurer: Financial Strength, Customer Service, Claim Payment History, Reviews and Reputation. Compare multiple quotes before you make your decision.
Purchase your life insurance policy
as young as possible for the following reasons: 1) Lower Premiums 2) Better Health Approval 3) Long-Term Savings & 4) Financial Discipline. The younger and/or more healthy you are, the cheaper your coverage will be.
Benefits of Buying Life Insurance Early
Lowered Premium Costs
Higher Health Approval
Savings for Long Term
Financial Discipline
Insurance is Cheaper the Younger and Healthier
You Are
Tax Advantages
In Several Countries:
Death Benefits are Not Taxable
Cash Value Grows
Without Income Tax
Local Rules and Regulations Differ
When Life Insurance is Not Needed
If You are Single with No Debts (You have No Dependents) and/or Your Income is Unneeded to Handle Daily Living Expenses
Conclusion
You don’t have to think of life insurance as just another expense; you can also consider it financial security and comfort. Life insurance allows your family to live their lives without worrying about all the money they will need if you die.
Whether you choose term life
(low rates) or whole life (for long-term benefit), starting is crucial. The sooner you get your policy, the less costly and more secure it will be.
Take time to assess your own needs, compare policies and select the best amount of insurance based on your financial objectives. Providing protection for your loved ones will help them greatly in the future.
