Life insurance is essentially being there for those who count on you – even when you're no longer there. When you're gone, your loved ones will be at a financial loss (not to mention emotional trauma). You can spare them the worries about:
- How they can pay your medical and funeral costs
- How they can maintain the household and pay mounting bills (rent, groceries, transportation costs, etc.)
- How the children can afford to get a college education
- How they can keep the house and continue paying the mortgage amortizations
When you die, you are no longer there to provide the income that contributes towards the support of your family. Basically, life insurance is a financial product that will replace that lost income, it protects your family from the financial devastation that can be caused by your loss.
Choosing the right life insurance cover for you
Your decision to get life insurance, as well as the kind of life insurance cover, will have great significance for you and your family – and the effects of this decision will reverberate for your's and your family's lifetime. However, making this decision may not be as easy as you think. There are a lot of options and the terms and jargon can be confusing.
Types of insurance:
The life insurance products available basically fall into two categories – term life insurance cover and permanent life insurance cover.
Term Life Insurance Cover. Term life insurance policies provide temporary coverage. The insurance protection is only for a term. Once the term ends, you can opt to renew the policy or allow it to expire. Premiums are paid for the term and may change when the policy is renewed, unless premiums are guaranteed. Term insurance is cheaper than permanent insurance since there are no cash values accumulated.
Although term life insurance provides more value at the early years of the policy, as you continue to renew the policy, the premiums may increase in relation to your age and health condition. Term life insurance cover is ideal for temporary needs and for those who don't have the budget for permanent life insurance. It can be used to secure your family's future while your children are young. Then you can drop it when they are already financially established.
The sum insured of a term life insurance policy can also be programmed to increase or decrease, depending on one's needs. It can be increased to account for inflation. It can be decreased to cover financial obligations that lessen over a period of time (i.e. a mortgage).
Permanent Life Insurance Cover. Permanent life insurance policies are life insurance products that accumulate cash value and provide continuous protection as long as premiums are paid regularly and promptly. There are two components in life insurance – the protection component (where death benefits are paid to the beneficiaries upon the Insured's death) and the savings component (where cash values are allowed to grow on a tax deferred basis).
Here are the permanent life insurance products:
- Whole life. The cash value of the products grows at a pre-determined rate and the life insurance covers the Insured for his whole life. The cash value here is more or less guaranteed.
- Variable life. The Insured has the option to invest a portion of premiums into various types of investments (such as bonds, stocks, a combination of both and other options). It is called "variable" because the sum insured and cash values will depend on how well the selected investments perform.
- Universal life. This product provides the Insured the flexibility of choosing the level of death benefits and premium payments within the life of the policy.
Choosing between term and permanent life insurance cover
Here are some tips in helping you decide between the two:
|Term Life Insurance||Permanent Life Insurance|
- More "bang for your buck". Since term is more affordable, you can get more coverage for less premiums.
- Can be renewed when a term ends (this depends on whether renewability is guaranteed, as well as your health condition).
- Convertible term policies allow term life policies to be converted into permanent life policies.
- Continuous protection
- Has cash values
- Premiums remain level
- Earnings on cash values are tax deferred
- Premiums may increase over time as one ages and as one's health changes.
- Since there are no cash values, you don't get anything at the end of the coverage period.
- More expensive than term
- Not cost-effective when the policy is cancelled early in the life of the policy
|Things to consider||
- Is the policy guaranteed renewable? Up to what age? What are the terms of renewal?
- Are premiums guaranteed? Up to what age? Will premiums increase after that? How often will the premium increases be?
- Is the policy convertible? Will I need to show proof of insurability when I convert? How much of the current sum insured will be convertible?
- Can I afford the premiums with my current income?
- Can I keep up with the premiums over the long term?
Aside from the basic life insurance coverage, here are some riders you can add-on to your policy to strengthen the protection it provides. Riders work as amendments or special provisions that provide additional benefits:
Accelerated Death Benefit. This rider provides a portion of the death benefit when the Insured is diagnosed of a terminal illness. This provides the Insured and his family with the funds for treatment and care. The Insured, at this point, is expected to live for less than a year. After the Insured's death, the remaining portion of the death benefit will go to the beneficiaries.
Accidental Death Benefit. This rider pays an additional amount if the cause of death is an accident.
Accidental Death and Dismemberment/Disability Benefit. Works the same as the Accidental Death Benefit, but it provides additional benefits for dismemberment/disability as well. It makes use of a table of what percentage of the death benefit is provided for certain levels of dismemberment or disability (i.e. loss of one limb, use of two limbs, loss of use of one eye, etc.).
Critical Illness Rider. This rider is different from the accelerated death benefit. This provides a percentage of the Sum Insured if the Insured is diagnosed with a critical illness that is listed in the policy.
Disability Income Rider. This provides a monthly benefit for the Insured if he is declared totally and permanently disabled.
Guaranteed Renewability rider. This rider is usually for term life insurance policies. This guarantees the renewability of the term life policy without having to provide proof of insurability. However, after the guaranteed renewability expires, renewability will be subject to the Insurance Company's underwriting policy. If you are deemed uninsurable, the Insurance Company may not renew the policy.
Hospital Benefit Rider. This provides a daily hospital benefit if the Insured is hospitalized. It may also provide benefits for surgeon's fees and medications. If you are looking for a quick access to treatment when you most need it, check out healthinsurancequotes.co.uk for private health insurance quotes.
Waiver of Premium Rider. This waives the premiums if the Insured is declared disabled. The waived premiums may be for the entire duration of the policy, for a specified number of months or until the Insured remains disabled. This may vary from the way the policy is set up.