Are you looking to buy life insurance? Life insurance is certainly one of the most overlooked aspects of life. Simply put, this is a contract between a person and the insurance company where the company agrees to pay an agreed sum of money upon the death of the insured person who is the policyholder.
Besides death, there are other triggers of payment, such as terminal illnesses and critical illnesses. Life insurance policies, like other insurance frameworks, are legal contracts with terms that describe the extensions and limitations of the contract. Specific exclusions in the contract are highlighted to guide the liability of the insurer.
If you are thinking of taking a life insurance cover, you should understand some basics about this type of policy. Choosing among the various life insurance policies can be bewildering and difficult to understand. Well, hopefully, this article sheds some light.
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Types of Insurance Policies
As mentioned, getting to understand the various life insurance policies can be daunting. There are several types of life insurance policies provided by many insurance companies. But which one is best for you? Check out the following types.
1. Term Life Insurance
This life insurance policy provides financial cover for a specified period of time, for instance, 10 or 20 years. Premiums paid during this period remain the same for the entire period, and the policy may offer continued coverage after the agreed period, but with a higher premium amount. Term life insurance is often less expensive compared to other life insurance types.
Proceeds from term life insurance can be used to replace lost potential income thus can provide a safety cash net for your family and beneficiaries. It offers financial security and provides an assurance that your financial goals are met regardless of what happens.
2. Universal Life Insurance
As the name suggests, universal insurance cover provides lifetime coverage. Unlike other types, this insurance policy is flexible and allows the policyholder to increase or lower premiums throughout the lifetime. Due to its lifetime coverage, universal life insurance premiums are quite high than term insurance policies.
Most people use universal life insurance as a flexible financial planning strategy as it only benefits the beneficiaries of the policyholder. It can also be used as an income replacement strategy if your family needs extend way beyond the working years.
3. Whole Life Insurance
Whole life insurance is almost similar to universal life insurance, but with slight differences. For starters, it provides cover for a lifetime. This perhaps explains the high premiums payable compared to term life insurance. However, unlike universal insurance, premiums are fixed and have a cash value that can be used as a savings strategy.
How To Choose A Life Insurance Policy?
Settling on either of the insurance policy types mentioned above is certainly challenging. For many, it is hard finding out the balance between what they need and what’s available. That said, consider the following factors before choosing your life insurance policy.
Purpose of the insurance
It is important to ask yourself why you need the insurance policy in the first place. The needs for life insurance varies greatly depending on personal situations. For instance, if you don’t have dependents, you probably don’t need to get life insurance. Similarly, if you don’t have enough income, you may or may not need to get cover.
However, if your monthly income is vital in supporting various family activities such as paying a mortgage, sending kids to school or paying recurring bills, you should consider taking a life insurance cover. This ensures that these primary financial obligations will be met in case you die.
How much coverage do you need?
Applying the rule of the thumb, in this case, is quite difficult. This is because the amount of insurance you need hugely lies on several factors such as your source of income, your debts, lifestyle, and the number dependents. Nonetheless, experts advise that those interested should get a policy that is more than 5 times their annual salary.
Note that this isn’t a general rule and you can consider inquiring from your financial planning expert to help you determine the amount of coverage best for you.
Type of life insurance policy
As mentioned above, there are three main types of insurance covers. Each cover varies and is perfectly suitable for people with various needs. Therefore, check on the specific details of each cover before settling on one. Consult an insurance expert for better insights about this.
Cost of life insurance
Different types of life insurance attract varying costs paid as premiums. Whereas some are fixed, others are flexible and can be adjusted by the policyholder. The cheapest life insurance cover is one provided by your employer if they offer such an arrangement. Most employees offer term policies, implying that you will be covered for the period you are an employee of the company.
Costs of other insurance policies vary depending on the type of policy chosen, commissions, and other factors. Most insurance companies calculate costs or premiums based on the projected life expectancy, level of risks such as family medical history, lifestyle, and other determinants. Smoking, for instance, will increase the risks calling for higher premiums compared to one who doesn’t smoke.
Most policies have hidden costs in the form of fees and commissions that only come up once you have purchased the policy. Bearing this in mind, check out the various life insurance policy costs and go for one that matches your income.
Bottom line
The need to purchase life insurance can be necessitated by many factors. For instance, you may be looking to protect your family and dependents’ lifestyle in the event of your death. You could also be looking to secure your financial stability or build your family’s wealth. Regardless of the reason, find out more about life insurance before purchasing a cover.
It is important to note that there is no optimal time to purchase life insurance. Life insurance is purely age-banded and becomes expensive as each year passes. Insurance experts, however, advice that below 35 is the optimal age to purchase a life insurance cover. This comes in the wake of other things such as beginning and establishing families, mortgage, and businesses.
