It’s funny but true. People are willing to insure their car, their house, or any other valuable asset, yet their life – more precious than any of the above – is uninsured. Does this dread for death or perhaps a sense of invincibility stop them from seriously considering a life insurance?
Maybe yes, maybe no. But life is fleeting, death uncaring of time. Better leave your family in tears than in debts over the costs of burying you and other needs that a life plan should have taken care of.
September is Life Insurance Awareness Month. In keeping with that and offering tips in getting a viable life insurance, let’s get to know life insurance as we answer your questions one by one.
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What is life insurance?
It’s a contract between you and the insurer that when you die, the insurer will give a payout to your beneficiaries. In some cases, you can get returns on investment and earn interest as you’ll know later on.
Sickness, accident, even natural causes of death. A life insurance protects your parents, spouse and/or kids against financial losses when you die.
With the checks you made to your insurer every month, quarter or year, you are giving your family access to a viable source of funds to:
- Pay off mortgage debt
- Pay off other debts, especially those with high interest rates
- Fund all or a portion of education costs
- Secure the future of your loved ones
Whole and Term
In the past, life insurance was as standard as any 30-year fixed-rate mortgage, except for the situation of each policy owner who most of the time is the insured person that makes each plan unique.
Nowadays, various types of this insurance coverage exist catering to where you are at in your life and what you or your family needs exactly.
Life insurance policies are broadly categorized into two types, whole and term life insurance.
Whole: Called as permanent life insurance, this policy covers the lifetime of the insured person. When the covered person dies, the insurer will provide the death benefit to the policy’s beneficiaries. The policy remains in effect for as long as premium payments are made or until the maturity date.
An important feature of whole life plans is the cash value (surrender value or cash surrender value). It is what a policy owner receives upon cancellation of the policy. By receiving this cash value, the policy owner surrenders his/her entitlement to benefits under the policy.
Cash value is different from the death benefit or the policy’s face value.
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Whole life policies are subcategorized into:
- Traditional policies ask for fixed annual premiums, minimum cash values and minimum death values. Upon your death, your beneficiary will receive the full death benefit regardless of the accumulated cash value. What’s more, traditional policies can distribute dividends to their participating policy owners.
- Universal policies are interest-earning whereby premiums made toward the account value earn interest. Interest earned can be used to pay for the policy’s premiums. Other universal policies allow for policy owners to borrow against the accumulated cash value.
- Variable universal life insurance, or VUL, is an insurance plan that combines a traditional death benefit with investment. A portion of your premiums goes toward equities or stock that could boost your policy’s cash value. Over time, the returns from these investments can be used to pay for the premiums.
Term: These policies are meant to provide temporary coverage, put in place for certain contingencies. This is applicable when you are holding a high-risk job or engaged in a high-risk activity.
At its core, a term life insurance offers a guaranteed death benefit. You’ll pay less on a term life plan because there’s no cash value. Premiums however can rise at a certain point in the life of the policy.
What do I need to know when buying insurance?
It’s a tough choice between a cash value and a term life insurance in itself. When shopping for a suitable life insurance package, we have two important reminders for you.
Personal Factors Affect Your Premium Pricing
Like loans, life insurance policies are underwritten and applicants evaluated by the insurers’ officers.
You are never too young for a life insurance but don’t drag your feet until you are uninsurable because of pre-existing health conditions. The younger you start, the lower your premiums will be. This is based on the assumption that you have many years ahead of you to pay for your insurance.
Whether you are a man or a woman also has a say on your premiums. Insurers, backed by research, believe that women outlive men so insurance packages for the former are usually cheaper than for the latter.
Your health matters. Insurance companies have access to your medical records including hospitalization, can request for a full medical checkup including your BMI to check on any diseases that are life-threatening. If you are a smoker or a drinker, you could be denied of an insurance or pay more in premiums.
It doesn’t stop there. As even your work, lifestyle and driving history are also scrutinized.
Every DIME counts.
Experts agree to disagree on how much coverage your life insurance should carry because everyone is different.
To help you calculate the right insurance amount, you can turn to DIME. This stands for debt, income, mortgage, and education.
For your life insurance policy to stand, it must be sufficient to (i) pay for debts you leave behind, (ii) cover your income needed to maintain your family’s standard of living until such time as your youngest kid turns 18, (iii) pay off the mortgage debt, and (iv) send your kids to school.
How do I know if I’m getting a good deal on my life policy?
In getting a life insurance, be sure to let the financial advisor or insurance agent know what you want to achieve, how much you can afford, and for how long you can keep paying it. This helps both of you plot an ideal insurance package that works for you.
The insurance agent can give you a proposal outlining the terms of the policy based on what you want. Go over it together and ask questions about its terms that you don’t understand. You don’t have to settle for the first offer as you can add riders that supplement your primary coverage, increase your death benefit, or modify other terms.
Getting a life insurance means working closely with the financial advisor to get the best results.
Costs are not exactly the be-all and end-all of any insurance policy. Remember, there are insurance policies that cost less but provide less-than-adequate coverage while some have heftier premiums but their coverage makes up for it.
When you are your family’s one-and-only, you can only ensure that they are well taken care of when you are gone.
Image courtesy of Life Happens
To help you keep track of going insurance costs as early as now, get in touch with an insurance specialist today. [sc_content_link]