Life insurance is one of the essential financial tools for financial planning. It might seem like a waste of money, but it’s actually one of the smartest investments you can make for your family.
Life insurance protects your family’s future by ensuring that they’ll be able to pay for essential things like your mortgage, bills, tuition, and other expenses.
If you die suddenly without life insurance, your family will have to sell assets, borrow money or even go into debt in order to meet their financial obligations. This can be disastrous if your family’s not financially prepared for your death.
In this article, we will explore what life insurance is and how it works. So if you’re confused about whether you need life insurance or not, you’ll find the answer when you’re done reading this article.
What is Life Insurance?
As the name suggests, a life insurance policy is an insurance policy taken out by individuals to provide financial support to their families in case of their demise. It’s basically a contract between the insurer(insurance company) and the insured(you).
The insurer agrees to pay a sum of money to the insured’s family members in case of their death. This insurance policy can be a great financial assurance tool if you have dependents like children, parents, or a spouse.
How does Life Insurance work?
There are many reasons why you should consider taking out a policy. First and foremost, it provides financial security for your family’s future. But how does life insurance work?
Every time you get a paycheck, a certain percentage gets automatically deducted as a payment towards your life insurance policy. These payments are called premiums, and they ensure that your family will have financial stability after you’re gone.
These premiums are based on the coverage package you choose and the risk the insurance company perceives in insuring your life. The risk here implies your chances of death. The riskier your day-to-day life activities or, the older you are, the higher the premiums you will be paying each month.
Upon your death, the insurer will hand a hefty check to your family or next of kind. The amount your family member(s) receive depends on your coverage package. So make sure you do an estimate of how much your family will need to survive after you’re gone.
But should you just buy any life insurance? Before getting any life coverage, you should know precisely the type of insurance policy best suitable for your situation. So we are going to explore the different kinds of life insurance policies.
Different types of Life Insurance
There are many different types of life insurance policies that you can choose from. You just need to decide what suits your needs the best. The three most popular ones are:
1. Whole Life Insurance
This is a type of permanent insurance policy that covers you for your entire life. You pay premiums to the insurer for as long as you live, and in return, they offer life insurance coverage. Depending on your needs, there are also different types of whole life plans that you can choose from.
This insurance policy is the most expensive because the insurer has a guaranteed payout to the insured’s family.
2. Term Life Insurance
This is another common type of life insurance policy. With this kind of plan, there’s usually a term mentioned in the name, like a 15-year term life insurance plan. This type of policy covers you for a particular amount of time. It only pays out in case of death during this period. It doesn’t cover you after the term is over.
3. Universal Life Insurance
This is another common type of life insurance policy where the sum insured increases every year. This type of life insurance combines whole life and term life plans. So it can be used for a particular period or your entire lifetime. It also has some tax benefits.
Now you know different types of life coverage, let’s explore the benefits of having it.
What are the benefits of Life Insurance?
Life insurance has many benefits. Let’s take a look at six of these benefits:
1. Secures Financial Future
The most important benefit of life insurance is that it secures your family’s financial future. If you get a life coverage policy and pass away, your family will receive a lump sum of money. They can use this money to cover essential costs like the monthly rent or mortgage repayments.
2. Prevents Borrowing Money or selling assets
Life coverage helps your family in case of an unexpected event. If you die without life insurance, your family will have to sell off your assets or borrow money in order to meet essential expenses.
This can lead to problems in the future if they don’t have any financial stability. With a life insurance policy, they won’t need to worry about this at all.
3. Peace of mind
Life insurance gives you peace of mind knowing that your family will be financially secure if something unexpected happens to you. You can live without having to worry about your family’s survival after you’re gone. It is a huge relief.
4. Your children’s education costs
This insurance policy will help your children if something happens to you. They’ll be able to continue with their education without having to worry about how they’re going to pay for it.
You can choose the amount of money that your family receives after your death, and you can also decide what will be done with this money.
For example, they can use it to cover your children’s college fees, or you can offer it as a financial gift after your death. The choice is yours.
5. Tax benefits
Not everyone knows this, but you can receive tax benefits when you get a life insurance policy. You’ll be able to claim the premiums that you pay on your policy as donations and even deduct them from your income for tax purposes.
6. Disability waiver of premium
Another excellent benefit of getting life insurance is that the death benefits will continue to pay out even if you become totally and permanently disabled.
Most life insurance companies know how hard it can be to earn money when you’re disabled, which is why many policies include a waiver of premium provision. Meaning your premiums get paid for as long as you’re considered disabled.
Who needs Life Insurance and who doesn’t?
Let’s talk about who needs life insurance first.
If you have dependents, i.e., people who rely on your income, then you should take out a policy. You might not be earning much now, but as time goes by, your family will grow, and so will the number of dependents.
If something happens to you without life coverage, your family will have to pay for the essential bills out of their pocket. In worst cases, they might have to sell off assets like property or take out huge loans to survive. This is not something you want for your family’s future, so it’s better to prevent this situation by getting a life insurance policy.
Now let’s see who doesn’t need life insurance.
If you’re single, you don’t have any dependents, or if your dependents are financially secure, you don’t need life insurance. There’s no use in getting a policy that will just cost you more and not give you any return.
How much should you get?
There is no set amount for life insurance. It all depends on your needs, requirements, and what you can afford. You can get a basic term policy that will cover your expenses for a few years or a permanent Whole Life Policy that gives you lifetime coverage.
If you need to cover any debts like credit cards or loans, you should go for a term policy. These policies will also help your children financially if something happens to you.
Suppose you want to cover financial obligations like car payments and monthly rent. In that case, you should take out a permanent whole life policy. The premiums are higher, but the payout is more significant as well.
How to get Life Insurance?
Getting a life insurance policy is not that hard. Here are six steps you need to follow to get life coverage.
Step 1. Get quotes from various insurance agents:
It’s best if you speak with a few agents before buying a policy to give you accurate information about the different plans available in the market. There are also a couple of trustworthy insurance companies you can get quotes from online.
Step 2. Find out your needs and prepare yourself:
The amount of coverage you need will depend on what you want to use the money for after your death. We know this is not a pleasant picture but imagine yourself gone and picture your family’s financial need.
If you don’t already know how big your funeral expenses will be, now is the time to find out. Also, see if there’s anything else your family will have to pay for in case of your death. For example, they may need to pay for your children’s education or help them buy a house.
Once you get an estimate of how much your family will need to survive, you will know exactly which coverage is optimal in your situation.
Step 3. Choose the type of policy:
Once you’ve decided how much coverage you want, it’s time to choose what type of plan best suits your needs.
Step 4. Underwrite for your policy:
Your agent will help you with this step after you’ve decided on what policy to get. The decision is based on the risks involved in insuring you. The risk evaluation accounts for factors like; how old you are, health, lifestyle, and nature of your job.
The riskier these factors are, the higher the coverage you might be accepted for.
Step 5. Get your policy:
Once you and the agent agree on terms and conditions, the insurer will issue a life insurance plan in your name. Make sure that both of you sign it and then submit it for registration with the company at an office or online.
Step 6. Pay your monthly premiums:
Once you’ve got your policy, you can now start paying your monthly premiums. Remember always to pay your premiums to avoid any issue during payout.
When it comes to life insurance policies, just make sure that you have enough coverage for your needs. You can go through the process yourself or hire an agent who will help you along the way.
Just make sure that you pay your monthly premiums on time once you get a policy so that everything runs smoothly. And most importantly, don’t forget to use your life insurance for your needs, whether it’s to pay off debts or cover your children’s education.