What Is Life Insurance and How Does It Work?
Most Canadian definitely have home and auto insurance policies. Life insurance policies seem to be at the bottom of the list of priorities with only 60% of Americans having life insurance coverage.
It may be that you have been considering buying a life insurance policy or perhaps you are just too busy, it has not crossed your mind. If you have loved ones who are solely dependent on your income to survive, you should be conscious of how life insurance can ensure their future in case anything happens to you.
Read closely and learn all about life insurance policies, the benefits of owning life insurance, how much it costs, and which type of life insurance policy is right for your current situation.
What Is Life Insurance?
Life insurance is an agreement/contract between you and the life insurance company. You pay for the life insurance in the form of monthly or annual premiums. When you die, the insurance company will pay a certain amount of money to your loved ones/beneficiaries.
Some say, life insurance is a morbid topic to discuss. Look at it this way, though: You buy a life insurance policy so that when you die, your surviving loved ones will be financially secure.
Your life insurance policy will take care of these things when you die:
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Cover your loss of income
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Pay for your funeral expenses
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Pay for your debts at the time of your death
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Provide for the financial needs of your loved ones after your death
In summary, this means that the moment you sign your life insurance policy and start paying the monthly premiums, you have bought your peace of mind. This further means that you have secured the financial needs of your loved ones after your death.
Who Needs Life Insurance?
Honestly, everyone needs to own a life insurance policy. Regardless of age and financial status, a life insurance policy will provide financial security for your loved ones when you are gone.
Everything you need to Know about Life Insurance
Many say that a life insurance policy can be one of the most boring documents you will ever read in your lifetime. It is however important that you are familiar with the terms used in your policy coverage. This will help you understand how a life insurance works.
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Policy. This is the contract/agreement between you and the life insurance company.
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Policyholder. This refers to the owner of the life insurance policy, which is normally you. This is the name that appears on the life insurance policy as the insured person.
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Premiums. This is the monthly or annual payments you make to the life insurance company to own the life insurance policy.
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Beneficiaries. These are the name/names listed in a life insurance policy as the people who will receive the death benefit of your policy when you die. These are typically your spouse, children, or anyone you assign.
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Death Benefit. This refers to the money the life insurance company pays to your beneficiaries when you die.
In summary, when you (policyholder) starts paying the life insurance company (premiums), the company ensures that they will pay (death benefit) your beneficiaries
Types of Life Insurance
There are two basic types of life insurance policies: one that is valid for your entire lifetime (permanent life insurance) and one that lasts within a predetermined time (term life insurance). There are other types of life insurance policies but they are variations of these two basic types of policies.
Permanent Life Insurance
This type of life insurance policy will last for your lifetime. It means it is coterminous with your life and will expire with your death. Included in this type of insurance policy are:
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Universal Life Insurance
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Whole Life Insurance
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Variable Life Insurance
Benefits
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Insures you for your entire lifetime
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Comes with an investment component allowing you to receive a cash value for your policy. The insurance company invests a portion of your premiums in an investment account. The earnings of the investment account will fund the cash value of your policy.
Many financial experts say that the cash value life insurance is not a good financial option. They say there are other better financial portfolios that will give you higher returns for your investment.
Term Life Insurance
This type of life insurance will give you coverage for a predetermined period of time and will expire on the date specified. If you die within the term of your life insurance policy, your beneficiaries will receive the death benefit as stipulated in your policy.
A term life insurance policy is less costly than a permanent life insurance policy. This is so because it only pays for the death benefit. It does not come with an investment component which can increase your premiums.
Which Life Insurance Policy is the Right Fit?
At different stages in your life, there is a life insurance policy that is the right fit for your specific situation:
Young Professionals
At this stage, you may have student loans and credit card debts that will remain unpaid at the time of you death. If you are debt-free and without any dependents, all you need to take care is your burial cost.
If a group life insurance plan is part of your compensation package with your employer, there is yet no urgency to buy your own life insurance policy.
Newlyweds
When you get married you promised to be there with your spouse through thick and thin. In this case both you and your spouse need to have a life insurance policy.
This time, this is not just about paying debts when one of you dies. This is now about protecting and ensuring the financial security of the remaining spouse.
Parents
The financial security of children needs to be ensured in the event that either of their parents passes away. You and your spouse need to each have a life insurance policy even if one of you does not work outside of the home.
The death of the earning parent as well as the stay-at-home parent would cause a big blow to the family budget. The cost of childcare these days are not cheap.
Think of how much it would cost to provide for the education of your kids, run the household, and maybe payoff your home loan. These expenses will continue long after you or spouse passes away. Owning a life insurance policy will give you both peace of mind.
Retirees
At this stage in your life, you may have already secured your retirement savings. If you have a hefty amount in your retirement savings, you may not even need a life insurance policy.
However, if you are still adding up to your retirement savings and still amortizing your home, your spouse will no longer have your income to rely on to make these payments if you die today. Your retirement savings may not be sufficient for all these payments.
Cost of a Life Insurance Policy
The cost of your life insurance will depend on whether you are buying a permanent life insurance policy or a term life insurance policy. There are other factors too that will impact the cost of your life insurance. Your monthly premium will be based on:
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Age
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Gender
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Weight
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Medical history (personal and family)
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If you are a smoker
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If you are a regular traveler to dangerous parts of the world
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If you are into risky hobbies (shark wrestling, scuba diving etc…)
Once you have submitted these details, the life insurance company will schedule you for a medical examination. This requirement is not applicable if you are buying a no medical examination life insurance.
Being aware of how life insurance companies compute monthly premiums on your life insurance policy, it is time to do your share to reduce your premium payments. While there is nothing much you can do with your age, you can quit smoking, try to lose weight, and engage in regular exercise.
Determining the Amount of Life Insurance you Need
Financial experts say to determine how much life insurance you need, set the amount of your death benefit to about 10-12 times your yearly income. This will ensure the financial security of your family when you are gone.
Your family/beneficiary can invest the proceeds of your death benefit and earn interest on that investment equivalent or even more than your yearly salary/income. This will give you the peace of mind that your family will have financial security even when you are gone.
Is it Worth Buying Life Insurance?
The right life insurance policy for your specific situation is always worth it!
Many financial experts say that a term life insurance policy is your best option when looking for the right life insurance. It should be able to give your family protection and financial security when you die.
Unlike a permanent life insurance, term life insurance does not come with an investment component bringing down the monthly premiums. If you want to invest some of your money, invest them in mutual funds, they will give you higher returns and get a term life insurance policy.