How to Choose the Right Life Insurance Policy
Published on May 25th, 2015 | by Joan Makai
Life insurance forms a critical component of personal finance management. But it is usually added at the end after providing for all other expenses. Effectively, most people buy life insurances out of funds if any, remaining with them after meeting all other necessary and unnecessary expenses. Some even consider it to be a waste because they cannot see anything tangible from such purchase. Nevertheless, it is necessary to buy insurances such as life insurance and medical insurance because of uncertainty.
Why you should buy Life Insurance?
Basically, life insurance is a provision for family members in the event anything untoward happens to the bread winner. Because of tax benefits, many people are opting to buy such instruments. Money paid as premium is never wasted. The insured can avail loans on some of the life insurance policies if needed. These policies are also acceptable as securities against any outstanding amounts. If required, the insured may also surrender the policy. The amount paid at the end of some of the long term policies is usually more than the sum total of all premiums paid. It may be argued that more interest may have been received by them. While that is true, it may also be presumed that the difference in interest was utilized to provide insurance cover against the risk of sudden debts cascading on loved ones.
Who should buy Life Insurance Policies?
Young adults with no family responsibilities do not consider that it is necessary for them to purchase any life insurance. But they too need to buy a policy at the earliest because premiums are lower when the policy holder is younger and these premiums do not increase, unlike almost all expenses which compound at the rate of inflation.
How to Choose the Right Life Insurance Policy?
There are plenty of fine prints, which are generally common to all life insurance companies because these in turn are governed by some authority. Nevertheless, insurance agents work on commission, and may hard sell life insurance policies exaggerating the risks, and steering the buyers towards policies that fetch higher commissions to agents. Therefore, the process starts with
- Knowing the difference between term and whole life insurance policies
Whole life insurance policies are expensive but necessary. Term insurances are cheaper but will not cover the entire life.
- Knowing how much cover you need
This differs as per responsibilities, age, debts, tax benefits, financial obligations in future, plan to replace income with proceeds, etc. It is also not necessary that the proposer buys the entire coverage at the outset. Periodically, new policies can be purchased to supplement the previous policies. Also, the life insurance basket can be a combination of term and whole life insurance policies. For example, a person takes a home loan of $200,000. Then buying an additional coverage to meet an equivalent amount is necessary. This can be fulfilled with term insurance which is cheaper. Whole life insurances are usually taken to meet any outstanding debts and funeral expenses. Therefore, term insurance would be a better choice for finite period liability, or any financial requirement in any specific year or years such as children’s education and vacation.
- Consider Tax Benefits
There may be tax benefits on premiums paid, and these may help to save some taxes for additional amounts in future.
- Do not mix insurance with retirement investment
The two are different categories. Using insurance products for retirement planning would be expensive.
- Do some online research
In the past, it was easy for insurance companies to get away with offering less for higher premiums. But now, there are many online ranking businesses as well as reviews written by people about all products, including life insurances. Studying different policies, the extent of coverage available to them, and any adverse remarks against the product can help people to zero in on the life insurance product most suitable to their needs.
As the age advances, insurance requirement also comes down because all retirement incomes start kicking in. After all, life insurance is a financial provision for loved ones, providing them with enough if the bread winner is no longer able to provide. At retirement, the bread winner also depends upon other sources of income which would anyway be available to the survivors, whether or not the bread winner survives. Therefore, a combination of term life insurance policies with whole life insurance policies would ensure that term life products mature by the time the insured retires, reducing the liability towards premium at retirement.