Life insurance isn’t something people talk about very much - as a whole, most discussions of death are swept under the rug. However, in the event of one’s unfortunate demise, it pays to have a life insurance policy that’ll ensure your dependents are taken care of. It can be a daunting process, and one that can get complicated, but it’s very important.
Before running off to get your life insurance, here are 5 things you absolutely need to know.
1. Insurance =/= Investment
There are lots of insurance plans out there marketed as being great “investments”, guaranteeing that you’ll get more money out of it than you put in. However, insurance is not an investment - it’s a risk management plan. Don’t be distracted by all the bells and whistles of a plan - focus on what matters, which is how much this policy will help your dependents in the event of your death.
The main aim of a life insurance plan is to help those left behind with any final expenses, remaining debt, educational costs - and above all, allay any concerns about finances during a time of grief.
2. Life insurance is a contract
When you have a life insurance policy, it’s an agreement between the insurance company and you, and they have a financial interest in the life and livelihood of someone else. How insurance works is that premiums are pooled and claims (or death benefits, in the case of life insurance) are paid out from that pool.
In a life insurance policy, there are four players, much like a game of mahjong. The insurer pays out claims, the owner pays the premiums, the insured is the person upon whom the policy is based, and the beneficiaries are the ones who receive the death benefit when the insured passes on.
3. Term vs Permanent Insurance
If life insurance provides money for your loved ones to settle existing debt and expenses after you pass on, then surely the premiums must be through the roof, right? Well, wrong. Life insurance can be crazy expensive, but it doesn’t have to be.
First of all, life insurance is divided into two broad categories - term life insurance and permanent life insurance.
Term life insurance provides coverage for a certain period of your life, usually durations of 10, 20, or 30 years. If you pass on during the term of your insurance, it covers your dependents. This is a good option if you have young children, as in the event of your premature demise, they’ll still be able to be taken care of and provided for. Ideally, your term should expire around the time your family has no need for life insurance - when your children are all grown up and financially stable.
Permanent life insurance, on the other hand, insures you for pretty much your entire life, no matter what. They provide a death benefit, but also contain an investment component. The premium remains the same, the cash account grows at a steady rate, and you have lifelong coverage. However, it is way more expensive than term life insurance, due to the combination of investment and coverage for life.
4. Figuring out the optimal policy isn’t all that complicated
Life insurance seems frighteningly daunting. What kind of policy should we get? How much coverage do we need? As a starting point, the recommendation is to find a policy that would replicate all or most of the insured’s income for as long as the household expects to need it.
A general rule of thumb would be to take the insured’s annual income, times it by 15, and get a policy with a death benefit equivalent to that for a term that would last till the insured presumably retires. For example, if John earns about $100,000 a year, he should get a policy with a death benefit of at least $1,500,000. This is just a starting point, but it does give you a good idea of what you should be looking at.
5. Know your options before you cancel anything
Sometimes, despite our best efforts, we might end up paying a premium that’s too high, or with a policy that doesn’t really fulfill our needs. First thing’s first, check with your insurance agent about how to go about canceling your policy. Some policies have pretty stiff penalties if you cancel within a given time period, so it may be better to wait it out to avoid burning a hole in your wallet.
Also, make sure you find another policy that’s better for you and be very sure you’re covered by that before canceling any existing policies. You don’t want your family to be left out in the cold in the unlikely event a terrible accident occurs in between you canceling a policy and obtaining a new one.
Whether or not you get a term plan or a permanent plan, sit down and weigh all the pros and cons. How much can you afford to pay in premiums? How extensively do you need your coverage to be? Speak to an insurance agent to figure out which plan is the best for what you need.
Regardless of what you do in life, getting life insurance is a vital step to ensuring that both you and your family, will have peace of mind no matter what happens.