Life insurance is not something that a lot us consider as part of our financial plans. I have recently been looking into life insurance to ensure that my loved ones are protected in the event of my death (oh no, who wants to think about that?). Although I have my coverage through my employer, I needed to get more coverage, so I researched a bit into it and found out that there is a lot to learn for the average person on their own before shopping for a life insurance through a broker. I wanted to share a few life insurance types hat I have discovered that you need to know to save you time, research, and hopefully money.
As I researched the subject, I learned that every adult needs a life insurance as part of their overall financial planning, especially if you have dependents (spouse or children). You also need life insurance to mitigate risks to your financial assets and provide your loved ones with income replacement in the event of your death (hard to imagine but necessary for planning purpose). As such, life insurance should form an essential part of your financial planning and you need to know the basics about it as you make an informed decision. To help you get started, here are few things you need to know about life insurance types:
Life Insurance
In simple terms, life insurance is a way to protect your survivors against potential financial hardship in the event of your death. In other words, it is a legal contract or agreement between you and an insurance company that will guarantee payment of the policy when you die. But what kind of life insurance should you choose; permanent or term?
Life Insurance Types
There are various types of life insurance policies to choose from but you need to know about the two main type of life insurance – permanent and term. As the name indicates, permanent insurance covers permanent needs such as supplemental survivor income for your spouse or taxes at death, while term covers temporary needs like a mortgage or a business obligation.
Permanent life insurance
Permanent life insurance has several names such as whole life, universal life, and variable life. All these are essentially designed to provide you with insurance protection for your entire lifetime, as long as you keep paying into the policy. Most permanent policies have premiums that remain the same over the lifetime of the policy, even though the risk of death increases with age. This is a unique feature of permanent life insurance as you may need to pay more at the front end of the coverage for guaranteed premium over the life of the policy. The key advantage of permanent life insurance is that you will have your coverage permanently without regard to your age or medical condition unlike the term life insurance which ends at specific time and the premier increases overtime although not as expensive as the permanent life insurance at the beginning of the coverage.
Term life insurance
Term life insurance on the other hand provides you coverage for a specified period (e.g., a fixed number of years such as 10, or 20, or 30, or to a set age) and then expires. A death benefit is paid only if you die during the term of the policy. The premiums usually remain the same during the specified term but may increase if that term is renewed (e.g., premiums would increase every five years on a five-year renewable term policy). Most term policies are non-participating and do not include cash values or other non-forfeiture values. Hence, premium costs are lower than for permanent policies, especially when you’re younger. The advantages of term life insurance include lower premium and affordability to many people than the permanent life insurance. Also, with term insurance, your insurance is also guaranteed to be renewable, even if you are in poor health and would not otherwise qualify. One of the disadvantages of term life insurance is that premiums may increase with each renewal term – often significantly and this can be quite expensive.
The trick with term life insurance is to buy enough coverage and ensuring your coverage does not expire at some point when you will most likely need it and will be hard to be insured with poorer health and advanced age. You should also ensure that your term life policy is convertible to a permanent policy without a medical exam, up to a specified age. This will ensure you will have coverage regardless of your age and health conditions.
Group life insurance
Another common form of life insurance is the group life insurance. Chances are if you work for a public or big private company, you probably have this form of life insurance through your employer or union. Generally, it is a type of a term life insurance and is available up to age 65 and is issued to a group of people under a master contract. For large groups, it is often issued without a medical or other evidence of insurability. Your group insurance is an important element in your total insurance coverage. But the coverage usually terminates if you cease to be a member of the group. You may want to check first to see if the plan allows you to convert to an individual life policy if you leave the group or if the coverage terminates for other reasons.
It is suggested that if your immediate obligations are significant and you don’t have a lot of funds available to spend on insurance, that you go for whatever insurance policy will meet your current needs. In this case, term or group insurance might be the best options for you. If on the other hand, cost is not an issue and you have the funds to buy permanent life insurance, then that would be a better option for you. Depending on your individual situation and your financial plan, you will need to determine the right option for your situation. Now that you know the difference between permanent and term life insurance, how much coverage should you buy?
How much coverage to buy
This is probably one of the hardest things to figure out in choosing a life insurance once you have made up your mind about which life type of life insurance. While there is no definite or right answer to this question, a rough measure that is used sometimes is between five and seven times your current net income. As you do this, you will need to look at your assets that would be available to your dependents, liabilities they would have to deal with, and income replacements your loved ones will need. Whatever coverage you choose should protect your loved ones in the event of your death so that they don’t have to bear the costs and hardships. You can check out the various financial institutions life insurance calculators to help you figure out the give you an idea of the amount of coverage you would need.
What expect from insurance companies
There are slew of insurers in the market. You will need to do your own search at Ratesupermarket or work with an insurance broker to find you the right kind of insurance coverage. Remember that insurers are in the business of selling you their products and generally accept over 90% of applicants for coverage and provide standard premiums. You should be upfront in answering questions on your application and be prepared to fully disclose your medical and other issues (e.g., smoking, line of work etc). Misrepresentation could cost you and your loved ones coverage. You should also expect medical tests if you are buying large amount of life insurance coverage.
Life insurance companies must take into account a lot factors when determining to offer you their policy. Your premium will depend on many factors, such as the type of policy you buy, the amount of the death benefit, your age, sex, smoker status, and health. Before you are accepted for insurance coverage, you may also need to undergo a simple health exam, depending on the insurer and amount of the policy you purchase. In a nutshell, be prepared to disclose a lot of information about yourself.
Final thought
Life insurance should form an important part of your financial planning. Every adult needs to have at least some life insurance. If you have dependents, it will even be vital that you will need one. While there are so many options to you on life insurance, what you need to know is that there are two basic life insurance types – permanent and term. Permanent insurance generally costs more upfront but gives you the coverage for life, while term is only for specific years and may cost less at the beginning but premium will likely rise when renewing. Despite these differences, you should have some life insurance either through your employer, or by purchasing separately that will meet the future needs of your loved ones. Don’t wait as you never know when you will need your life insurance. If in doubt, consult a reputable insurance broker in your area and make it part of financial future.
What life insurance types do you have? Is the coverage adequate to cover your family’s needs in the event that you suddenly pass away?
