The right life insurance plan is one of the most important financial decision you will ever make as it gives you that peace of mind and ensures your loved ones are financially taken care of in the event of an unfortunate thing. However, there are many options, terminologies and policies with which to base your choice of the right life insurance plan. In this guide, we detail the basics to consider to determine which life insurance policy in best fits you and your family. This guide will walk you through whether you’re just getting started or are looking to update the vision you already have.
Understanding Life Insurance Basics
In fact, life insurance is essentially a contract between you and an insurance provider. You pay regular premiums and in return the insurer makes a promise to pay out a set amount to your beneficiaries should you die. Life insurance exists to help provide for your loved ones after you pass. This can help out with daily living expenses, for example other outstanding debits as well as future expenses including that of education or retirement.
When choosing the best life insurance plan, it’s essential to understand the two main types of policies: term life insurance and permanent life insurance.
Term Life Vs. Permanent Life Insurance
Term Life Insurance It is less complicated and more cost effective. It covers a specific term between 10 to 30 years. The income you earn from the term will terminate after you die during the term, and your beneficiaries will receive a death benefit. If the term runs out and you’re still alive — no payout. If you just want coverage for a fixed period of time, considering term life insurance is best especially if you have temporary financial needs, such as a mortgage or children’s college tuition.
Permanent Life Insurance, Secondly, it is for the whole of your life, so long as you pay the premiums. Such type includes life, universal and variable life insurance policies. Permanent life insurance also builds policy cash value and can be borrowed against, or you can withdraw the cash value if needed. Although more expensive, permanent policies are for those who want life coverage that lasts forever and the added bonus of cash value build up.
Factors to Consider When Choosing the Best Life Insurance Plan
- Coverage Amount
- It’s about determining the amount of coverage you want, based on financial obligations you’d want covered if you weren’t able to be present yourself. This includes things like living expenses, debts, education costs and pursuit goals. A good rule of thumb is to have the coverage equal 10 to 12 times your annual income, but everyone has a situation that’s unique and you need to make sure the coverage is what your family needs.
- Policy Duration
- Decide the term length and buy for term life insurance. A 20- to 30-year term does make sense if you’re young and have a young family. But if you have older children or defined end of some other type of financial obligations, you might need only shorter term. However, with permanent policies you do not have a term to worry about, as you will be covered for your entire life.
- Premium Affordability
- One important thing you need to remember is to go for a plan you can afford the premiums on over time. If you allow one of your policies to lapse because you failed to pay, your family will not be covered. The premiums for term life insurance are generally less expensive than for permanent life. So, decide if you’d rather have higher upfront premiums with whole life policies (for lifelong coverage), or lower premiums with term policy.
- Riders and Add-Ons
- With Riders, you get to make your life insurance policy fit your needs. Accidental death benefit, waiver of premium, critical illness and disability income are common riders. Though riders might add a bit to your premiums, they can provide real value by adding to your coverage. Talk to your insurance provider about potential riders and find out which ones will suit your budget.
- Cash Value Component
- If you’re looking for a policy with a cash value component, a permanent policy such as whole or universal life might be what you are looking for. The cash value grows tax deferred and you can draw it while you are alive. A cash value policy often is regarded as a “forced savings” kind of deal, but it’s also worth remembering that these policies generally are costlier.
- Company Reputation and Financial Stability
- Places to get life insurance are a must, from a reputable company. Assessment of financial stability of the insurer is based on ratings given by A.M. Best, Moody’s or Standard & Poor’s. Secondly, it’s a good idea to read customer reviews and research claim settlement history when it comes to this type of company. When it’s a life insurance policy, it’s a long commitment so pick a good provider who will be with your family years to come.
Types of Life Insurance Policies: Which One is Right for You?
To help you pick which type of life insurance is the best to ring the change, here’s a breakdown of the top types of life insurance policies that cover your insured with it.
Term Life Insurance
This is the simplest and easiest type of life insurance to avail. Term life insurance is ideal for younger people, although it’s also good for those who just need to temporarily cover life up until a specific number of years has passed. If these cheap premiums sound good to you, it’s a good choice.
Pros: Affordable, straightforward, flexible term options.
Cons: No cash value, coverage ends when the term expires.
Whole Life Insurance
Whole life insurance is a permanent life insurance policy which provides lifelong coverage and which builds a cash value. For life, most policies carry higher premiums but the premiums stay the same, the policy collects value that you can borrow against and future increases in the value of the bond to which the policy is linked do not reduce the value of the policy.
Pros: Lifelong coverage, cash value accumulation, fixed premiums.
Cons: Higher premiums, less flexibility.
Universal Life Insurance
Also universal life insurance provides permanent coverage and a cash value component. The main difference is that it has flexible premiums and adjustable death benefits so that your policy can be increased or decreased depending on the need.
Pros: Flexible premiums and death benefits, cash value growth.
Cons: Premium adjustments can be complicated, potential for lower cash value growth.
Variable Life Insurance
A permanent policy of variable life insurance allows you to invest the cash value in a variety of sub-accounts, like mutual funds. With this policy having higher growth potential, there’s also higher risk involved, as the cash value fluctuates with the same performance of your investment.
Pros: Potential for high cash value growth, lifelong coverage.
Cons: Higher risk due to market fluctuations, typically more expensive.
How Much Life Insurance Do You Need?
The level of coverage you need is a personal decision, dependent on your financial obligations, family needs and longer term goals. Here are some key questions to help calculate your coverage needs:
- What are your current debts? – Include in this any outstanding mortgages, personal loans, credit card debt, etc. To prevent your family from inheriting debt, the death benefit should cover these.
- What are your family’s living expenses? – These are day to day costs including rent, groceries, and healthcare. The aim is to offer enough to keep them going for a set string of years, such as 10 to 15.
- Do you want to cover future expenses? –These should figure in if you plan to fund your children’s education or help support your spouse’s retirement.
- What is your existing financial support? – Whatever other sources of income or savings you have there are (such as pensions, social security benefits or investments).
Choosing the Best Insurance Provider
When it comes to life insurance, who you buy from is just as important as what you buy. Consider the following when selecting an insurance provider:
- Financial Strength: Choose a company that is financially stable and highly rated by independent rating agencies.
- Customer Service: Read customer reviews and consider the quality of the provider’s customer service. In a time of need, your loved ones will depend on a reliable and responsive insurer.
- Claims Settlement Ratio: This indicates the percentage of claims the insurer has settled. A higher ratio means a better likelihood that your claim will be honored promptly.
Tips for Lowering Your Life Insurance Premiums
- Buy Early: Life insurance is more affordable when you’re young and healthy. Locking in a policy early will allow you to take advantage of lower premiums.
- Stay Healthy: Life insurance policies are often underwritten, meaning they test your health before setting premiums. Being on the safe side is to maintain a healthy lifestyle to qualify for better rates.
- Consider Term Insurance First:However, if it’s a matter of affordability, the first thing to get on your list is a term life insurance. If you can afford it, you can always convert it to a permanent policy later.
- Avoid Unnecessary Riders: Only add riders that are relevant to your situation, as each rider increases the overall premium. Choose riders that provide significant value to your specific needs.
When to Review or Update Your Life Insurance Policy
Your insurance needs change, too, and life changes. Make sure your policy reflects where you are in your life today by taking a look at it occasionally. Consider reviewing or updating your life insurance plan when:
- You get married or divorced.
- You have children or adopt.
- You buy a new home or take on significant debt.
- Your financial situation changes significantly.
- You change your career or retire.
Conclusion
Investing in the best life insurance plan doesn’t have to be difficult. Knowing how much types of policies are available, what you need, and all the factors noted above will help you make an informed decision that protects your family’s future. Remember that life insurance isn’t just a financial product; it’s a safety net to be sure your loved ones are protected, even when you are not around to make sure of it.
It’s possible your needs or financial goals will change over time, so don’t close your eyes to revisiting your policy periodically. One of the best investments you can make to ensure long term security and peace of mind is via a well chosen life insurance plan.
