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Death is such a morbid thing so families hardly talk about it, much less plan on how to handle it.
Having a good financial plan will help cushion the impact and stress of untimely passing of a family member. It gives an assurance that the family will be financially unimpaired even if the breadwinner suddenly dies.
Many financial advisors will quickly suggest life insurance. After all, companies design their life insurance products specifically for that need. They take away the worries and provide peace of mind. But do you know what type of life insurance is the right one for you? Choosing the right one is the delicate part.
Getting life insurance does not guarantee that you will be good financially for the rest of your life. It also doesn’t assure that it will be sufficient for your family’s needs in the future. Situations, circumstances, and financial needs change as time passes and unforeseen needs may come in later.
It is always important to review your life insurance policy after major events. You may have to make adjustments to your coverage.
The Most Important Factors When Choosing Life Insurance
This might be the most important item to consider before buying. If you need a short or medium period policy of around 5 to 30 years, term insurance is advisable.
Term insurance is less expensive than other insurance types. However, term insurance doesn’t really work for people who want coverage for as long as they live. People whose fixed obligations and regular income are higher usually prefer term insurance. They are attracted to the cash value feature of the plan because it somehow works as a retirement fund.
Another reason for the choice is that the premium is more affordable. In a case like this, an investor should choose a plan with a good conversion option. Should they want or need coverage for a much longer time, they can easily change the policy. If an individual wants to have insurance coverage for his entire lifetime, permanent life insurance is the right one.
The insured will pay a higher annual cost but in the long run, the net cost will be considerably lower.
The government gives life insurance a special tax treatment. In most cases, the insurance proceeds are free from taxes. In other cases, tax on the accumulated cash value is on a deferred basis. So, if you have the funds to invest, you can purchase a permanent policy with cash value. You will have to pay higher premiums but while insured, you also build up an investment account inside your policy. This accumulated cash value has no restriction to use.
Many investors use it to build funds for a news house, their ‘dream boat’ or to just simply supplement retirement.
Term Or Permanent Life Insurance?
With so many insurance products in the market, it can be confusing to find what to get.
Nevertheless, it is a very crucial stage of the decision-making process. Here are some guidelines to help you choose the best one for you.
Why Term Life Insurance
You should get a term life insurance if you need life insurance for a specific period of time.
You can make a term life insurance effective according to the length of time of your need. If you want to build up a college fund for your young children, a 20-year term life would suffice. You would have the money by the time they are to enter college. Or maybe you want to pay off a debt that will become due in a few years’ time. You can get a term policy for that period.
Lower Premiums For Youngers
You should get a term life insurance if you need a large amount of insurance but have a limited budget. This type of insurance pays only if the insured dies during the time of the policy. This causes the premiums to be lower than that for permanent life insurance. If the insured is still alive at the end of the term, the coverage automatically ceases. The insured has the option to renew the policy or buy a new one to continue his coverage. Unlike permanent insurance, the insured will not be building equity in the form of cash saving.
For investors who are anticipating that their needs would change during the period of the policy, there are ‘convertible’ policies. Convertible term policies allow the insured to convert to permanent insurance without medical examination. However, he would have to pay a higher premium.
Typically, premiums are lowest when the insured is still young. As the insured ages, the premiums adjust upward. Some companies let term insurance policyholders renew their policies when it ends. They will, however, charge a higher premium. Some policies will require a medical examination before renewal for the insured to qualify for lower rates.
Why Permanent Life Insurance
You should get permanent life insurance if you want insurance coverage as long as you live. When the insured dies – whether he’s just 20 or 100 years old, the insurance pays death benefits to the beneficiary.
Get this insurance if you want to build up some savings that will grow on a tax-deferred scheme. The funds you accumulate could prove to be very convenient for your future needs. You could borrow from this fund and use the proceeds for a myriad of purpose. The good thing is, you could take out a loan against it regardless of your credit score.
You could also use the fund to pay your premiums; you wouldn’t have to dip in your pocket every month. In case you die with an outstanding loan, the insurance company will use your death benefit to settle your debt. If there is still something left from the benefit, the company will give it to your beneficiary.
Premiums for permanent policies are higher than premiums for term insurance. However, they stay the same no matter how old the insured gets. On the other hand, premiums for term insurance tend to go up each time it is renewed.
Permanent life insurance also has several sub-types. There’s whole (ordinary) life, universal life, and variable life.
Other Factors To Consider When Setting The Amount Of Insurance Coverage
Market participation & cash value
Insurance protection for the long term? Check. Potential to build cash value and fund you can borrow? Check. Lower premiums? Check. If you need all these features, then you should consider permanent life insurance. The next question is: which of these three types of permanent life is the right one for you?
- Whole life insurance. This type of policy will build value based on a set schedule. Your insurer will tell you how much cash value your policy has at each anniversary. In case you have taken out a loan against it, your cash value will decrease accordingly.
- Universal life insurance. This type of policy will allow you to earn a fixed interest on the cash value of the policy. It states a minimum guaranteed rate. Over time, the interest rate may fluctuate but it will never go below the minimum guaranteed rate.
- Variable universal life insurance. This type of policy will allow you to invest your cash value in the stock market. So depending on how your investment performs in the market, your policy value goes up or down correspondingly.
Length of coverage
How long would you need insurance for? If you need an insurance coverage for a specific timeframe, then term life insurance is it. For example, you might want to have protection while you’re still paying off a mortgage. All other types of insurance will cover you for life as long as you pay the premiums on time.
Fees and charges
The expense side of insurance policies is not just about the premium. Some policies may have other charges connected to it. Before you sign the dotted line, make sure you know all the fees and charges you have to pay. Ask about fees you may have to pay in the future too.
Access to your money
Are you anticipating that in the future, you will need to take out money from your policy? For example, you might have to pay for your children’s college tuition. Most whole, universal and variable products will allow you to withdraw money from or borrow against your policy. However, some policies will have restrictions on when you can withdraw, how much you can borrow and the interest rate.
There are universal and variable life insurance products that will let you make flexible payments. This comes after you have paid enough to cover your policy charges.