If anyone relies on you financially, you need life insurance. It’s virtually obligatory if you are a spouse or the parent of dependent children.
Life insurance dos not simply apply a monetary value to someone’s life. Instead, it helps compensate for the inevitable financial consequences that accompany the loss of life like costs of final expenses including your funeral, outstanding debts and mortgages, planned educational expenses and lost income.
Life insurance is a contract (policy). A policy is a contract between a Life Insurance company and someone. The Insurance Company pools the premiums of policyholders and pays out claims in the event of a death.
There are four primary players, or roles, in a Life Insurance policy. These roles belong to the Insurer, the policy owner, the Insured and the Beneficiary(ies). The Insurer is responsible for paying out a claim in the case of a death. The owner of the policy is responsible for premium payments to the Insurance Company. The Insured is the person upon whose life the policy is based. The beneficiary(ies) is(are) the person(s), trust or other entity due to receive the life insurance claim – or death benefit – in the case of the insured’s passing.
Life Insurance is a risk management tool, not an investment. While some Life Insurance policies have an investment feature that can offer a degree of tax privilege, Insurance is rarely an optional investment. There’s usually a better, more efficient product for the financial task you’re trying to accomplish.
There are two broad varieties of Life Insurance about which you should become aware – Term and Permanent (Whole Life). Term life is the simplest, the least expensive and the most widely used. With Term Life, an Insurance Company bases the policy premium on the basis that the Insured will pass within a stated term – typically 10, 20 or 30 years. The premiums are guaranteed for the length of the term, after which the policy becomes cost–prohibitive to maintain or you decide to let it lapse. Yes, this means that you may very well pay premiums and get nothing out of it. But that’s good news, because it means you are winning at the game of life! Just like car insurance, you buy it but hope you never have to claim. Permanent (Whole) Life Insurance includes a savings element. This is designed to help the policy exist into perpetuity. Whole Life has an investment component much like bonds. Variable Life offers investment options more like mutual funds. Universal life was designed as a less expensive permanent Life Insurance alternative with added flexibility. One should do further more detailed research on these to make a clear decision before going ahead as not all options are available everywhere.
Life Insurance is never expensive, but is surprisingly inexpensive, and I have never met a widow(er) who told me their spouse had too much cover! If you apply for a “bells and whistles” Permanent policy, most people are pleasantly surprised when they see the relatively low premiums compared to the benefits. A smoker will likely pay more and someone with health problems could pay more too (or simply be declined for coverage) so stay healthy!
Determining the optimal Life Insurance policy for you doesn’t have to be complicated. It’s more important to get set up with something you can comprehend than it is to delay like protecting the ones you love – they will not thank you! In the vast majority of situations, a household can be well cared for by buying enough Life Insurance to replicate all of the Insured’s income for a term as long as the household expects to need that income. Consider this simple effective strategy for determining how much Life Insurance your household needs: multiply the wage earner’s income by 20 and purchase a policy with equivalent death benefit for a term that extends until person insured would presumably retire. Here is an example: Dave makes $100,000, $100,000 x 20 = $2,000,000 of death benefit; $2,000,000 earning 5% annually produces $100,000 of income.
Always use a qualified “Independent Financial Adviser” to help in your death planning. There are many online tools that can help give you an idea of how much money you should pay for the policy you need, but once you get to that point, I would recommend contacting a real, live Insurance Expert who can walk you through the application and underwriting process. The premiums at a given Insurance Company are identical whether you apply online, via a toll free number or with a person. Indeed, a knowledgeable and dedicated Insurance Broker may help you save money by choosing the best carrier for your particular situation.
Know your options when cancelling an existing Life Insurance policy so you don’t leave money, or coverage, on the table. If you have a policy that isn’t appropriate for you, it’s important to proceed carefully. If you feel that you have overpaid for a policy that doesn’t meet your needs, but you still need Life Insurance, don’t cancel the wrong policy until the right policy is in place. You could learn of a health complication that is going to lead to you being declined for new policy. Then you’d be left without any coverage! If you have an existing Term policy you no longer need, you can simply cease premium payments. If you have a Permanent policy with a cash value, you should analyse its investment value, as well as any tax implications, before cashing in. You can do so by requesting help from your Adviser – remember, if you buy online, there is no-one to help you………..
A useful guide as to what is important…………do you need to review yours? I am happy to help………