What is life insurance?
With a life insurance policy, you pay premiums, a certain amount as dictated by your insurance policy. These premiums can be paid every month, 3 months, 6 months, or year, throughout your life or for as long as the insurance policy requires. When you pass away, your beneficiaries, family friends, or loved ones receive a death benefit, a lump sum from the insurance company. This death benefit is decided by you during your life. They can use this amount to take care of your end of life expenses, like unpaid credit card bills, loans, or hospital bills.Best life insurance needs alot of research and things to remember while buying life insurance policy for your loved ones.
Why should I care?
Many people think they don’t need life insurance when they possibly might. Here is a list of reasons on why you might need to start looking for an insurance policy:
You have dependents
It is agreed by many that the best time you should get life insurance is when you have dependents. They could be a spouse, young children, disabled siblings, and ill parents, anyone who is solely dependent on you for income. With life insurance you can be at peace that in case if anything were to happen to you, your family and loved ones will be taken care of.
Your family might not be able to afford a funeral
With the average funeral costing between $7,000 and $10,000 in America, suddenly arranging for one can be burdensome and stressful. With life insurance, you don’t have to worry about your loved ones using up their hard earned savings or taking loans. The death benefit from your insurance policy will be enough for taking care of your funeral and burial costs.
You own a large estate
With large estates, transferring inheritance to your heirs can be difficult. The high net worth results in huge tax liabilities. A life insurance policy makes this easier, as the proceeds from your insurance policy can be used to offset estate taxes. You can then easily transfer to your heirs without worrying about inheritance taxes.
What do I look out for?
Shopping for life insurance can be very tiring, time consuming and seemingly impossible, especially when you don’t know what and where to start with. With the wide variety of life insurance options available, it is better that you do a bit of research at your own end so you don’t get more lost, or even end up getting an insurance that isn’t right you.
When looking for the right life insurance policy, keep the following in mind:
Term life or whole life
These are the two broad categories of life insurance. Term life insurance offers you coverage for a specific period of time, usually between 5 and 30 years. Once the time period expires, you can apply for the policy again, but often the premium prices get higher. Though you pay small premiums, you have to die to receive the death benefit.
Whole life insurance offers coverage your whole life, as long as you pay your premiums. It has a cash value that can serve as a savings account. You make more contributions with the premium that allow you to build a reserve. You can withdraw from the savings account during your life, tax free. But you need to remember that until you pay back, interest is accrued. Borrowing too much may cause the policy to lapse or you may be left to face the tax consequences.
Though a lot of people recommend that you should go for a term life, there are exceptions. Like every other decision, it depends on your needs, budget and situation. If you earn a high income, are young or want your family to inherit your wealth, a whole policy may be the right option for you.
Agents and brokers
Many insurance companies do not sell their policies directly to customers, but through agents or brokers. Though both have similar duties like getting you the policy that is in line with your needs and budget and explaining it properly to you, there are some differences.
Agents represent insurance companies and sign a contract with them that allows them to sell certain policies. For each policy they sell, they earn a commission. Agents can represent one or more insurance companies.
Brokers, on the other hand, operate on a client based model and are not bound by any contract. They work with several insurance companies. When you agree to buy an insurance policy through them, they ask the insurance company to issue an insurance binder. They too receive a commission for every policy they sell.
If you decide to buy through a broker be careful about the following:
- The agent or broker has an active licence and can sell the insurance policy you want. Many states have insurance department websites where you can look them up.
- They represent many life insurance companies. This will let you compare the different policies you can go with and decide the best one.
- They don’t use complex jargon but can explain the insurance policy in simple words.
- They are not making you buy a certain insurance policy because it will earn them a higher commission.
- They ask you different questions to get a good idea about your financial position, dependants, assets, etc. before recommending you a policy.
- They have plenty of experience.
- Fill out all the application forms yourself, this way there won’t be any misinterpretation of facts and you will understand the insurance procedure better.
- They are not the last word. So if you don’t like the policies they are recommending, do more research or look for a new agent or broker.
Reputable insurance company
Go for a reputable and financially stable insurance company. You can find ratings for insurance companies online. These ratings give you an idea of the company’s past and future financial position and performance. Companies like A.M. Best, Standard & Poor’s, Weiss Ratings, Demotech, Inc. and Fitch Ratings give these ratings.
Do your research and compare insurance policies from different life insurance companies. You can go to insurance agents or brokers or look it up online. There are many websites that let you compare insurance policies. But don’t waste time in trying to get the same insurance policy for cheaper. Insurance policy prices are regulated, so regardless of where you buy it from, it will cost the same. There may be discounts available, but that isn’t always the case.
Reevaluate the policy
The life insurance policy you get today, may be the best for your current needs but that does not mean it will always stay that way. Life gives unexpected surprises every now and then. You may get married in the future, have more children, get a bigger house, start earning more, develop a health condition, etc. All these things will affect your coverage. Even if you feel that your policy is fine for you, it is still a good idea that you do an annual policy check up with the insurance company.
If you are paying more premiums due to a certain health condition, reevaluation may help you get cheaper premiums, if your health has gotten better in at least the past year.
Life insurance is not an investment
Though whole life insurance has an investment component, you should not forget that the main purpose of life insurance is to financially protect your beneficiaries if you pass away and not investment. If you want to invest in something, look for other options as well, investing in whole life insurance isn’t always the best option for everyone.
There are chances that you may forget to make your premium payments on time or forget completely. If that happens your life insurance company might cancel your policy all together. So instead of paying manually, set it up as an automatic bank draft or credit card charge.
Also try to make the premium payments yearly instead of monthly. Though it may seem a lot, it will save you money in the long run. Many insurance companies charge extra for frequent payments and some may offer discounts as high as 8% if you opt for annual payment.
With all these life insurance companies out there, companies are always coming up with new policies to meet any gaps in the market and attract new customers. Some companies offer insurance policies that give you 25% to 100% of your death benefit during your life if you develop a terminal illness or have no one to care for you.
Do not lie or hide anything
This will save you from any unwanted surprises in the future. If you lie or misinterpret anything on your application, the insurance company is not obligated to honor your policy. Do not hide any health issues, speed tickets either, even if you thing they don’t matter. Being transparent will allow you to get matched to a policy that is best suited to you.
Many people put off buying insurance because they may think they don’t need it. But the truth is you should start thinking about if you have any dependents. Putting it off will only result in higher premium prices. There are chances that you may develop a certain medical condition in the future that may stop you from being accepted by any insurance company. Though age isn’t the only factor in determining if you need life insurance, Noexam.com concluded that the best time to get insurance is in your 30s. Business Insider calculated the price of life insurance goes up by about 63% between the ages of 30 and 40.