We never know what the future holds. So it’s our responsibility to protect ourselves and our loved ones from the unforeseen. Life insurance can help provide the protection needed in the event of your death. However, it requires careful consideration.
To understand life insurance, let’s break it down into four key elements:
- Coverage
- Premiums
- Beneficiaries
- Types of policies
Each of these can impact your options.
Coverage
Life insurance offers financial protection to your loved ones if anything happens to you. It acts as a safety net, providing a sum of money known as the death benefit.
The cover amount should be calculated based on your and your family’s current/future financial obligations and needs. A rule of thumb is to have at least 10 times your annual income.
Upon your death, a policy can pay out a cash lump sum to your loved ones. This can help them cover a range of costs, such as:
- Living costs like shopping, utility bills, and other daily expenses.
- Paying off a mortgage
- Childcare and education expenses.
- Medical bills
- Funeral costs.
- Debts such as loans, credit card balances, and car payments.
The more cover, the higher your premiums will likely be. Balance the cover amount and cost. It’s also worth considering any savings or investments that can contribute to your family’s financial security.
Premiums
To maintain the policy, you must pay premiums, which are regular payments made to the insurance company. The cost of these premiums can depend on various factors, such as:
- Age: The younger you are, the less you may need to pay for cover. If you opt to buy when you’re older, the premiums may be more costly due to the risk of death.
- Health: Having pre-existing medical conditions can impact premiums as well as your family medical history. In some cases you may need to undergo a medical exam to determine your risk.
- Job: Some occupations are considered riskier than others. For example, if you work in a hazardous environment. As a result your insurer may charge a higher fee.
- Smoking: Insurers usually charge higher rates for smokers due to the long-term health risks it causes. However, you may be able to reduce your rate once you’ve remained smoke-free for at least 12 months.
- Cover amount: The more cover you choose to take out, the more you’ll pay for premiums. Think about your needs carefully to avoid taking out more cover than needed.
- Policy type: Some policies are more expensive than others. For example, whole life policies typically cost more as they have no expiry date.
Beneficiaries
This is the person/entity you select to receive the payout after your death.
You can choose one or multiple recipients and specify how the benefit should be distributed. This usually includes spouses, long-term partners, children, other family members and business partners. It can even be donated to a charity.
Regularly review and update your agreement as circumstances change in your life. This ensures that the right people are taken care of and that your wishes are carried out.
Types of Policies
There are several types of policies available, each offering different features and benefits:
Term Life Insurance
This policy provides coverage for a specific number of years. It’s typically more affordable and straightforward compared to other types of policies.
It has three specific levels of cover:
- Level term: The cover amount/premium remains the same throughout the policy.
- Decreasing term: Typically used to cover a specific debt or mortgage. In doing so, the cover amount decreases as you make repayments.
- Increasing term: The cover amount/premium increases over time to keep up with inflation.
Whole Life Insurance
Unlike term life insurance, this type of cover lasts for the remainder of your life. It provides a guaranteed death benefit to your beneficiaries, meaning that it pays out regardless of when you die. This helps you keep up with your premium payments.
However, premiums tend to be more expensive, as you are essentially paying for lifelong cover. On the plus side, premiums remain fixed throughout the policy, so you can lock in a consistent rate. Overall it offers greater peace of mind than term life cover.
Joint life insurance
Joint life insurance is a type of policy that covers two individuals under one plan. It’s often taken out by couples, business partners, or any two people who have a shared financial interest. This type of policy is often chosen by couples who want to ensure their partner is protected if either of them dies.
Critical Illness Insurance
Though it doesn’t cover death, critical illness cover is worth thinking about.
This type of policy provides cover if you are diagnosed with a critical illness. It can be purchased as an add-on to a life insurance policy or as a standalone policy.
This can include conditions such as cancer, heart attack, stroke, or organ failure. If you are diagnosed with a covered condition, the policy will pay out a lump sum. This can help cover medical expenses and other costs associated with your illness.
Do your research
Don’t go in blind. Remember to thoroughly research and compare different policies and providers to ensure you’re getting the most suitable cover.
If you’re ready to explore your options, contact an insurance agent for more information.
