Have you thought about getting a life insurance policy? Why did you think about it in the first place? What risk were you trying to manage? Did you just contact an insurance agent and purchase a policy, or did you do some digging first?
When selecting a life partner, you would try to learn all you can about the person. Would you not?
The same principle applies to choosing a life insurance policy. Decisions that will impact the rest of your life should be taken only after careful deliberation.
Searching for the right choice may appear daunting and overwhelming, but a wrong choice may have terrible consequences.
Have you seen people crying after purchasing insurance policies and realizing they cannot pay the premiums or get the total amount they have spent so far on the premiums a few months down the line?
So, now that you have thought of purchasing a life insurance policy, considering the following factors will guide your choice.
When selecting a life insurance policy, the most significant factor you must consider is the policy type.
There are three main types of life insurance:
Term life insurance
This policy covers a specified number of years. Over this period, you have to pay a premium, and your beneficiaries get to receive a death benefit if you die within the timeframe. At the maturity of the plan, you stop being covered if you do not renew the policy.
You may use the policy to cover specific needs. For instance, if you are a young adult who has little kids? You can buy a policy that would cover the schooling years of your kids. Others purchase such insurance policies to pay off long-term debts in case they die. If they were to die suddenly within the timeframe, a debt burden would not roll over to their loved ones.
If you hope to enjoy a windfall from your life insurance plan later in life, this policy is not for you. It typically has no value to you as long as you are alive. At best, it is a hedge against risk. The good side to it is that the premiums are more affordable than that of a permanent plan.
Related post: This is What Happens If You Outlive Term Insurance
Whole life insurance
As the name suggests, this is a lifetime arrangement. From the day you sign on, the plan begins to accumulate value. Unfortunately, this plan is often treated as an investment and is more expensive. Therefore, before choosing one, think carefully about your ability to continue to pay the premium.
Some policyholders decide to cash out their policy before death. There are two ways to convert the money locked in insurance into cash. One way is to cash out directly. Another way is to take a loan against the cash balance. Borrowing against the balance helps you to reduce taxes.
Endowment plans have become a go-to policy for individuals who want an insurance product with an investment component.
Before you go any further, let me just tell you this, NEVER mix insurance products with investment products—bad idea. If you are buying an insurance product, just get that and purchase an investment product separately. We talked about it in detail here.
That said, some individuals buy an endowment plan because it offers both risk management and investment. Unlike a term life policy where you get nothing when the policy matures before your demise, an endowment plan provides you with a payout if you survive the policy.
However, this comes at a cost since endowment plans are pricier than term life policies and have other charges. The investment return is also not as high as you would expect when you buy an investment product on its own.
The circumstances surrounding the life of every policyholder are unique. When pricing premiums, insurance companies try to factor in this uniqueness. They factor in your lifestyle, health, age, smoking habits, travel history, and other indicators.
A lifestyle considered to be low-risk may mean lower premium payments. However, insurance companies that do not pay attention to individual habits make up for it by charging higher premiums.
Ensure you choose an affordable plan. Life is unpredictable. You may lose your job or encounter other financial difficulties. If your policy is too expensive, you may have to let go of your life insurance. However, an affordable plan may still allow you to keep up with payments despite financial challenges.
Remember, the purpose of life insurance is to protect your loved ones against any problems that may happen to you. Premiums should not be a financial burden to your family. Choose a plan you can conveniently afford.
Claims settlement history
Insurance companies are in the business of trust. You expect them to take care of your family at your demise. So ensure the firm has a reputation for holding its end of the deal.
Most online shoppers carefully examine reviews before making a purchase. Apply the same principle to insurance companies. The internet allows you to check out the claims settlement history of a firm. If you find any questionable activities or behaviors, that may be your cue to find another firm.
Note: insurance companies may reject some claims for whatever reasons. Examine those reasons and determine whether they are genuine or if the insurer is playing a scam game with its customers’ money.
You may think a term policy is the best for you, especially since it is more affordable than a whole life policy. If that is the case, consider selecting a firm that gives you the option of converting it into a permanent policy.
As you work for more years, you become better at your job. Because you are more experienced, your income may increase substantially. At this point, you may be able to afford a whole life policy. However, because of advanced age and possible health complications, beginning a new permanent life policy is never easy at this point.
Do not panic. There is a way out. Some insurance companies offer ‘convertible term insurance.’ If you think your financial situation may improve later in life, consider getting a convertible plan.
In the future, when you have a higher income, you can convert the term policy to a whole life policy. On the other hand, if your financial situation has not improved, you can renew the term insurance policy.
Some Insurance companies allow you to take out some of the premiums you already paid to cover costly medical expenses.
Other policy providers offer add-ons to life insurance to meet diverse customer needs. These added benefits are called riders, and they can be beneficial to you. For example, riders may cover unique events like a heart attack or death by accident.
Risk management is a big part of personal finance management. Life insurance policies are part of that. However, they are meant to protect your beneficiaries in case you are no longer there. When shopping for a life policy, treat it like a business deal. Ensure you get the best for yourself and your family. I would advise that you contact an insurance agent and get all the necessary information before purchasing any policy.