Financial Products: life insurance
What is life insurance?
Life insurance is a financial contract between you and the insurance company. Life Insurance provides financial protection for your loved ones if you die. You agree to pay a monthly or annual premium. If you die while you are paying, the insurance company will pay your beneficiary the face amount of the policy. The contractual agreement seems straightforward enough, but it seldom is.
The two main life insurance types are term life and whole life.
Term life insurance is the most basic and affordable type of life insurance. It provides coverage for a set period, typically 10 or 20 years, and usually has lower premiums than whole life insurance. However, term life policies only protect the financial burden of death or illness for a certain period. If you die before the period ends, your beneficiaries will receive the amount the company has agreed to pay upon your death. If you die one day later, your beneficiaries get nothing.
Whole life insurance is more comprehensive than term life insurance and provides coverage and premium payments for your entire lifetime. While it has higher premiums than term life insurance, it may be worth it because whole-life policies offer lifelong protection against the financial burden of unexpected death.
The insurance companies charge less for term policies because they are betting most of their policyholders will not die before the term is up. But on the other hand, a whole life policy will require the company to pay no matter when you die, as long as you keep paying the premiums.
What determines the cost of life insurance?
Many factors, including the insured person’s age, health, and lifestyle, determine the cost of life insurance. So, you can buy a large-term life policy at 25 for much less than you could at 50.
Life insurance companies use actuarial tables to determine the risk of insuring a particular individual and set premiums accordingly.
The death benefit paid out by a life insurance policy also determines its cost — the higher the benefit, the higher the premium.
Some life insurance policies also have riders that can add to the cost, such as those for accidental death or disability income protection.
Finally, the length of the policy term also affects its cost — shorter terms generally have lower premiums than longer-term policies.
The cost of life insurance can be very low for a young, healthy person. Therefore, you can buy a high-value policy for a low premium if you buy a term life policy. The risk to you is that you won’t die during the 25-year term. Then, if you want to continue the policy, it will cost more to buy it when you are 25 years older and probably not as healthy.
What are the benefits of having life insurance?
Life insurance provides financial security for your loved ones in the event of your death. The insurance proceeds can be a valuable tool to help them deal with unexpected expenses, such as funeral costs and outstanding debts.
Life insurance is an essential item when you have a young family. However, it can be less critical after your children are grown through college and starting their own families. The problem with this concept is that your spouse may still need to live on by using your insurance proceeds when you die.
Life insurance can cover final expenses, such as funeral costs and outstanding debts. This coverage can give your loved one peace of mind knowing they will not have to worry about these costs alone should you suddenly pass away.
Life insurance can also provide financial stability for your family in the event of an unexpected loss, such as the death of a breadwinner. This policy can help ease the burden on your loved ones during difficult times.
A life insurance policy is an integral part of a comprehensive financial plan. Not having coverage could lead to significant economic challenges if something happens to you unexpectedly.
Life insurance is generally affordable, especially compared to the potential costs of not having coverage. However, considering how important it is to have this type of protection, it’s worth researching what options are available to you. Then make sure you find the one that best fits your needs.
What to look out for in policy exclusions.
Make sure you understand the exclusions in your life insurance policy. Different insurers have different exclusions, so it’s essential to compare policies before you buy. Some standard exclusions include preexisting medical conditions, dangerous activities, and suicide. Be sure to ask your insurer about any exclusions that may apply to you. The insurance companies use these exclusions to decide whether to pay you or not.
How to decide on the type of insurance you wish to buy.
First, you must answer why you want it. Then how long do you want it to be in effect? This is a philosophical question based on how long you feel you should provide for your spouse. I have had clients who said forever and clients who said my spouse is on their own when I die. Both of you need to consider this decision together.
Secondly, how much do you want? This discussion focuses on how insurance proceeds will be used: to pay funeral costs, replace your salary, educate the children through college, pay off the home mortgage, etc.
Lastly, what can I afford? When we are young, many of us don’t feel we can afford anything but a term life policy. But you need to consider what happens when the term policy runs out. What are my choices at this point? This also goes back to the first and second questions that you answered.
As I reflect on my situation now, as a surviving spouse, I think I would have been better served by a whole life policy. But we all have to decide on our own based on how we prioritize using our money.
