Insurance serves two major purposes:
(1) to substitute for the insured’s income if he or she dies, and
(2) to ensure a quality of living for the loved one who remained behind.
The policyholders buy insurance cover from an insurance company and pay specific periodic amounts (premiums) for the term (duration or life) of the policy.
If the insured dies before the term is completed, a guaranteed sum (the face amount of the policy) is paid to one or more named beneficiaries.
If the insured survives the term then, depending on the type of the policy, he or she may receive the full or a part of the face amount of the policy.
When choosing a life insurance policy two of the main types of plans available are term life insurance and whole life insurance.
There are major differences between the two types of policies.
Term Life Insurance
Term life insurance is a policy with a fixed life or term during which payments are usually made periodically (i.e. monthly or annually). At the end of the policies life the obligations of the insurer end, in terms of having to pay out a sum on the death of the insured individual.
Term insurance is used for insurance on Mortgages, car loan, personal loan, credit card etc.
Term life insurance policies tend to be the cheapest form of life insurance that can be acquired to provide a significant benefit on the death of an insured individual.
The actual costs vary based on the parameters set by the insurer, with factors like age, general health, and smoking playing a major role in determining the actual price.
The cost of term life insurance increases the older that one gets, as the chances of dying increase each year, making late life term insurance often prohibitively expensive.
The specific benefit received can vary greatly and is stipulated by the terms of the actual policy purchased, with more funds being paid out resulting in higher premiums over the contract. Typical amounts paid out under term life insurance can include:
- Debt reimbursement to ensure the debts of the deceased don’t pass on to a spouse or dependents
- Education costs for dependents
- Funeral costs
- Mortgage costs
- Lump-sum payments
Whole Life Insurance
Whole life insurance (or permanent life insurance) is a policy set up where a set benefit is to be paid out on the death of the insured and does not expire (as long as all required payments are made).
The cost to the insured individual is often monthly or annual payments established at the onset of the policy that will not be changed over its life. The value of the policy is often a lump sum payment that is paid out on death or when the insured individual reaches the age of 100 or 120 now depending on the insurer.
One benefit of whole life insurance is that it can be a good ‘forced’ saving measure for individuals when planning for their spouse or dependents.
The cost of these policies can be high so they do tend to be utilized more by individuals with high income already. The biggest benefit of the plan is that the cost, while high, does not increase over time like term life insurance does. Once the terms are established the cost will remain the same.
Term Life Insurance vs. Whole Life Insurance
When it comes to purchasing term life insurance vs. whole life insurance the decision typically comes down to cost. While whole life insurance is a guarantee and the cost of your life will be consistent, it is initially often too pricey for many individuals starting a family or who are recently married.
In these cases, term life insurance is likely the best route to go to ensure that you guarantee the financial security of your loved ones. As with any major financial arrangement, it is important that you do review all of the details so that you have a clear understanding of the terms of your policy and don’t have any unexpected surprises.
Knowing how much insurance you will need as an individual can be a challenging endeavor. Nevertheless, having the appropriate insurance policy can save a lot of problems if an early premature death.
Getting the Right Amount of Insurance
Needs analysis can give you a better idea of what kind and how much insurance is required by your family and you. And the need to re-evaluate the requirement is paramount when a major change in life happens, such as a new child, or buying a house.
Once you have evaluated your assets and liabilities, you will be much better prepared to determine how much insurance you will need. You will want adequate coverage.
According to some company, an individual should never buy whole life because they are assuming that same individual will be able to save thru the different stage of his life to eventually no longer require life insurance.
Below is an example of life insurance versus net asset (saving) according to them
Whether you think this is good or not, well a matter of opinion I`d say,
Most bank will push really hard for you to buy mortgage life insurance, and life insurance on any loan you contract, however, there are a few thing they don`t tell you (what the bank don`t want you to know)
– the beneficiary is the bank
– Only cover the remaining of the mortgage or loan
– Premium will go up with age
– You may become un-insurable if you have health problem
Also, where the bank is supposed to help us in saving money they are in fact doing the total opposite, what I mean by that is instead of showing us how to save money on for instance life insurance they are trying to sell us life insurance on any and every loan we contract with them whether,
-you name it.
And each of them cost money which ends up being a large amount.
Personally, I like my method better. Based on my need analysis I have subscribed to one policy that covers everything.
Here is a list of the advantage I consider :
– 1 small premium
– Same premium for the duration of the term
– If I become ill, I have already contracted my life insurance prior, thus will not lose it, for as long I pay the premiums.
– I can convert to whole life a portion of the entire face amount at any time.
– I choose the beneficiary instead of the bank
– If I contract a new loan (column 3) I don`t need to subscribe to a new policy since the one I have already cover’s it, thus I am saving money there.
Please understand, that each month as I pay my loans, the face amount of the policy stays the same, so if I finished paying off my car and buy a new one, the insurance policy will cover the new loan.
So now do a little exercise at your home, take each contracted loan you have, credit card included and add each amount of insurance you pay on them each month, then, add all total amount owed for each loan, then, either go online or contact an agent and find out what would be the cost of a premium for someone of your age, health status (smoker or not).
I am 99% sure you will be disappointed, yes because you will think “ Why didn`t someone tell me that before, I would have saved so much”
Now take half of that money, put it aside for either rainy days, retirement etc.
With the other half, treat yourself.
Please note, I am not a financial advisor, or have a master degree, I am just sharing my experience and point of view.