Choosing the best life insurance policy is overwhelming. First off, the complex terms used can leave you more confused than when you started. It’s difficult to know where to begin.
However, the first question you need to ask is whether you need life insurance in the first place. Your answer will influence the next steps you need to take including the best life insurance for you.
Choosing a life insurance policy shouldn’t be as difficult as many people think it is. One of the main reasons why people don’t purchase life insurances is that they feel stunned by the different policies available. To help you choose, you need to know the various types of life insurance available in the market. This guide explains everything you need to know when choosing the right life insurance for you.
What is Life Insurance and Why Do You Need it?
A life insurance policy works as a contract. When you pay the agreed premiums to the insurance company, they will offer lump-sum payments also referred to as a death benefit. This benefit will go to the dependents or beneficiaries in the event the insured dies.
Whether or not you’ll need life insurance will depend on your current situation. For example, if you don’t have dependents, you might not need to take out a life insurance coverage. The same applies if you don’t bring home a significant portion of the family’s income.
On the other hand, you may need life insurance if the income takes care of the mortgage, college tuition for your children and other recurring expenses. In the event of your death, the life insurance will continue to cover these financial obligations.
The Risk of Not Having a Life Insurance
Not having a life insurance will affect your dependents. A huge percentage of families have a single breadwinner. If the pass on, the family continues to bear a huge financial burden. For some families, this means selling their home or the remaining spouse having to take on an extra job to take care of the expenses.
How Much You Need in Coverage
The amount you need in coverage will depend on your current financial situation. For example, do you have dependents, debt or other income sources? Also, your lifestyle will influence the type of life insurance you need. Nevertheless, financial experts recommend taking a life insurance worth 5 to 10 times your annual salary. This will take care of any financial responsibilities after you’re gone. However, if you need more than this, consult a financial counselor to help you arrive at an informed conclusion.
Types of Life Insurance Policies
There are various types of life insurance policies available. Read on to find out more:
1. Whole Life Insurance
As the name suggests, this insurance coverage offers cash value and a death benefit. It doesn’t come cheap, so if you intend on taking out this policy, prepare for high premiums. In conventional whole life policies, the premiums will remain the same until you’ve cleared the entire policy. The policy will remain active until you pass on regardless of whether you paid the premiums in full.
This policy is expensive due to the massive commissions you’ll have to pay in the first year and the fees which will limit the policy’s cash value in the first few years. However, the insurance companies embed these fees deep in the investment formulas, therefore, it’s difficult to realize the colossal amounts ending up in their pockets.
2. Variable Life Insurance
This insurance is a variant of permanent life insurance which allows you to open up a cash reserve which you can use to invest in the various options availed by the company. The performance of these investments will determine the value of the cash reserves.
With universal life insurance, you can vary the amount you pay in premiums. You can do this taking a certain portion of the earnings to pay the premiums. You can also adjust the death benefit amount, but you’ll have to part with more money to cover the administrative fees.
The Cost of the Life Insurance
Your employer is likely to offer the cheapest insurance policy. That is if they offer one. Most of the time, they are term policies. This means you’ll get the cover as long as you remain with your employer. However, some policies allow a conversion after termination.
Overall, the cost of life insurance will depend on the type of insurance you’ll purchase, the commission your agent will get from the company and underwriting practices. There’re also other factors which will determine the overall cost.
For example, your life expectancy based on the actuarial tables. You’re likely to pay more if you smoke, have a dangerous hobby or occupation, such as flying or are overweight.
With life insurance policies, expect some hidden costs in commissions and fees. In fact, you won’t learn them until after purchasing the policy.
Seek the Services of an Insurance Adviser
With so many life insurance policies, and numerous companies offering these policies, you should seek an insurance adviser. The adviser will do the heavy-lifting including researching for the best type of insurance policy based on your needs. The best part about seeking an insurance adviser is they’ll do all the work for you. However, you need to make sure the adviser isn’t affiliated with any insurance company nor receive any commission.
Choosing life insurance to suit your needs is an uphill task, but it doesn’t have to be. The internet is a great tool you can use to your advantage in order to research the best policy.
Besides that, you can also get insurance-related information and a reliable broker. You can then recommend these policies to your adviser for further scrutiny.
Insurance advisers recommend buying term insurance if you’re looking for insurance. If you’re looking for an investment, go for investment. Don’t put the two in one basket. However, if you aren’t a seasoned investor and you don’t understand the pros and cons of various life insurance policies, then stick to term life insurance.