Life Insurance is important because this protects our loved ones just in case something happens to us. Whether it be death, critical illness, or disability, life insurance will be there to help us get thru the unexpected circumstances we may face in our daily life. This can be used as income replacement of the insured person to keep the life going in the family.
Life insurance is also for retirement. When the time comes that an individual needs to retire, having funds as retirement income is important. This will help you live a life of leisure on your prime years for the hard work you did during your younger years.
Life insurance have other numerous purposes. It can also be used as Mortgage Protection, if an individual unexpectedly dies, the life insurance beneficiaries can use the life insurance to cover the existing mortgage, this will help protect the family from being driven out of their homes. It can also be used to pay debts and can be used as protection from bankruptcy, creditors cannot run after the death benefits of an insured person.
Life insurance can also be used as education fund. It can secure your child’s education and can be used to pay up the tuition fee and will help assure that your child will be able to finish his/her education on unforseen death of an insured individual.
Life insurance can also serve as an inheritance, an insured individual can get multiple life insurance policies and set different beneficiaries on each policy to serve as inheritance. Life insurance as inheritance is tax free.
When To Buy Insurance
Insurance is a great thing. With the great invention of insurance, thousands of homeowners are able, in a sense, to pool their resources; when calamity strikes the unlucky few, this financial pool can be drawn upon to rebuild their houses. This is what insurance is for: to protect you from devastating financial losses that you could not afford to suffer. To insure big-ticket items like your home is, again, a good idea. To neglect to insure your home would be foolish and irresponsible.
But, just because it makes sense to insure big-ticket items, it doesn’t follow that the same logic applies to small-ticket items. This is the mistake that many, many people make. They understand how insurance works for things like their houses, and they think the same logic works for insuring things like their cell phones and VCRs.
The bottom line is that you should not buy insurance to protect against losses you could afford to pay for yourself. This applies to items such as consumer electronics, cell phones, items being mailed, contact lenses, glasses, and predictable expenses, such as dental cleanings. And if you do the math, you’ll find that you’ll also come out ahead if you buy high-deductible auto and health insurance.
You may choose to try the following exercise. Every time you’re considering buying insurance for minor purchases, such as when you are buying a new DVD player, don’t buy that insurance. Record the amount that you saved on insurance, and keep track of the policies that you didn’t buy. Keep a running total of the amount that you saved by not buying such insurance. Then call your auto insurance agent, and increase your deductible from, say, P200 to P500, or from P500 to P1000 (the higher deductible the better, as long as you know you could afford to repair your car if you get into an accident, and as long as you feel comfortable with the amount). Do the same for your health insurance. Record the amount that you save each time you pay your premiums. (The best way to do this is to keep separate ledgers: Keep one for items such as consumer electronics, contact lenses, glasses, and so on, one for auto insurance, and one for health insurance.) Subtract from this running total the costs that you incur because of the insurance you decided not to buy.
While your ledger may dip into the “red” now and then, the vast majority of people who try this experiment will enjoy watching their balance move further and further into the “black.” The amount you save can be substantial. Ideally, you should put away the money you’ve saved, instead of just tracking it; consider opening a special “self-insurance” savings account. This way you won’t spend the money on something else. If your VCR does break, you will be able to buy yourself a new VCR using the money in your self-insurance savings. Over time, this account will likely grow. Once it grows large enough, you might feel comfortable raising, say, your collision insurance deductible even higher. The higher the deductible you can comfortably risk having to pay, the more money will go into your account instead of into your insurance agent’s pocket.
How to Buy Life Insurance
Life insurance can be a complex financial product to understand, with so many assumptions, riders, and projected values from life insurance quotes. Often, you end up buying a policy without fully understanding it. That’s too bad because you may be underinsured without knowing it. To make sure you have the right coverage, use the worksheet below.
Step 1: Determine how much coverage you need.
Before anything else, you have to assess how much insurance coverage you want to get, also called the face value in insurance parlance. The ballpark figure ranges from five to 10 times your annual income.
Remember: life insurance is about insuring against the loss of income. First, determine how much income your family needs every year to cover their expenses until such time they have fully adjusted to life without you. That includes mortgage, utilities, food, groceries, clothing, transportation, recreation, etc. That would amount to their total annual living expenses.
Now, add lump-sum expenses that should pay for your “final expenses”, such as funeral, hospitalization, and medical expenses as well as your estimated estate tax, if you have substantial assets. You may also want to add debt payments and the cost of your children’s education.
Step 2: Project the lump-sum needed for living expenses.
To figure out how much money is needed to fund your family’s annual living expenses, divide the amount by an estimated rate of return. A bond fund, for example, has an average return of 8%. So used this – but you can be more conservative or aggressive in your estimates. The result is the lump-sum amount that will fund your family’s needs every year. Add your one-time final expenses to get your ideal insurance coverage or protection needs.
Step 3: Figure out your current funding sources.
Once you’ve computed your total expenses, deduct whatever assets and existing policies you have that can close the gap. If your spouse is working, have other investments, and are expecting pension income, factor these. Or you may have already amassed savings for your children’s education, so you can count that out. Your mortgage may already have mortgage redemption insurance – a declining term policy required by your bank. Your employer may have group insurance which gives you some coverage. You may have an existing pre-need plan or bank deposit with free insurance. Deduct all these sources.
Whatever left is the total insurance surplus or shortfall. If there’s a surplus, you can decrease your coverage, but if you have a shortfall, which is more likely, you need to augment your existing policy with additional coverage.
Step 4: Identify what insurance features you need.
Most insurance companies actively sell their limited pay whole life insurance policies and endowment products. And they have different brands for each product variation, so it’s important to decide ahead what features you want.
If you picked term life insurance, you have simpler choices to choose from: annual, 5 years, 10 years, up to 60 year old, up to 65 years old, etc. Just make sure the policy is renewable – meaning you can renew it upon maturity without requiring you to have a medical exam. Consider also getting convertible term plan, which lets you convert your term policy into a permanent life insurance plan. Also, it might be best to get level term premiums for as long as possible.
But if you decide on a permanent policy, there are more features you have to decide on. Do you want a participating, i.e. earn dividends, or non-participating? Do you want to pay for the entire period of the policy, for a limited pay period, or just one time? Do you want guaranteed fixed benefits or variable benefits?
Step 5: Assess which riders to add.
Upon deciding on the features you want, consider the riders or extras tacked on to your policy. Take the time to understand what each rider is supposed to do and decide if you really need them. If you feel you need them, compare how much it would cost if you just bought a separate term, accident or health insurance policy. Once you’ve picked which the best insurance company to buy a policy from, don’t delay.
Affordable life insurance ensures that the dreams of the most important people in your life are kept. We really can’t afford to live without protection and without permanent life insurance.