Investing in life insurance is such an important decision. Your life insurance policy is going to represent your earning capacity even after you are no longer there. Your family is going to be supported and protected by the life insurance policy in their times of need. Since you do not expect to be always around when its time to utilize the funds, it’s best to know everything about life insurance and what it’s going to do for your family. To begin with, you have to know which questions to ask for getting a comprehensive idea about the whys and wherefores of life insurance policies.
- Do I or do I not need life insurance?
- How much insurance do I need to invest in?
- Funeral expenses
- Home mortgage payments
- College fees
- Transport expenses
- Car loans
- Food, clothing and daily expenses
- How does term life insurance work?
- What is whole life insurance?
- What are the differences and similarities between variable life and universal life policies?
This question may be answered by clearly defining your aim in buying life insurance. Define your purpose clearly. Is it to protect your family and children in the vent of your death? Would you like life insurance to work as a savings platform for you? If you are single and wealthy, there is no pressing need for life insurance as you would not have to look after any dependant after you are gone. But then again, if you are single and wish to keep aside a little something for a niece or nephew then life insurance might be a good idea.
But in the event that you single right now but look forward to getting married and starting a family, life insurance is a good idea. It will help your family against funeral expenses, debts, and loans in the future. Further down the line, children can benefit from the fund to go to college or get a head start in business. The minute dependants come into the picture you will need to think about getting life insurance. Home bound spouses who might not be making significant contributions towards the income need not purchase life insurance.
Since this is a flexible amount, this question is often a difficult one to answer at one shot. Several factors would play a part in how much insurance you need to buy for your needs. The contributing factors would be the sources of income now and in future, current and projected expenses (college fees, change of job, planning a baby), the number of dependants you have currently and if you expect more in the future, debts and loans that need to be paid – like home mortgages, car loans etc. There is no fixed rule here but as a general guideline, roughly 7 to 10 times the current annual salary would be a good estimate as you are attempting to fill a gap of about 7 to 10 years with your money in the event that you are not around.
Make a list of expenses
If you are a smoker or are overweight, you will be charged higher rates as you will be considered a higher risk. Likewise, if you have a hobby that is considered risky like flying, parasailing, or bungee jumping, your rates will be higher. Online calculators help you get at a ball park figure of how much insurance you would need.
Term life policies work by providing affordability and flexibility to the insured by offering maximum insurance for minimum costs. Term life insurance works by offering a fixed amount of death benefits in case the insured individual dies during the covered time period but does not offer the capacity to build up a cash value through out the life time like whole life does. Term life is more economical and easily affordable to families who do not enjoy high sources of income.
Term policies are usually adopted by employers who offer life insurance to their employees during the time they are employed there. If the employee decides to quit his job, the insurance ceases to be valid. On the other hand, if death occurs while he is on the job, the insurance will pay his family the benefits his policy pays for.
Term insurance costs much less than whole life and depends on several factors such as age, health condition, addictions (tobacco, alcohol) and occupation. Many companies offer the option to convert a term life policy into whole life at some point but the premiums would be higher.
Whole life insurance refers to paying out a fixed sum of money every month or annually towards a much bigger pool of money that will get paid out to the beneficiaries in the event of your death. The premiums stay constant irrespective of inflation or rising costs and many companies offer dividends to their clients who own whole life insurance policies. Whole life insurance policies have a much higher capacity to build sizable cash value than term life. In addition to this, the death benefits amounts are also much bigger than for term life. Your investment in whole life swings between the life insurance as a protective mechanism and life insurance as an investment mechanism. Whole life policies have a savings component which invests a part of your money in markets and stocks etc to help add value to your investment in the policy.
A variable life insurance policy allows the insured to juggle his investment between the insurance and the investment portfolios as he wishes. Though most people do not do this by themselves but refer this to the investment department of the company, the policy does offer the flexibility to do this.
Universal life Insurance also offers switching your money back and forth between the insurance and investment segments of the policy but with one significant difference. Here, you may use the proceeds from your investment segment to pay for the premiums for your insurance one.
