What’s the importance of a life insurance policy and what choices do you have? Well, some important questions to ask yourself is, how much property and financial responsibility do I have? If something were to happen to me, would my loved ones, who would assume these responsibilities, be able to keep up with these responsibilities without you? If the answer is no, then securing a life insurance policy is a necessity for the sake of your loved ones.
What is Life Insurance? In the simplest form, it is a guarantee of money from an insurance company to your loved ones if you pass away. This money is usually not readily provided to your loved ones when you do not have a life insurance policy. In many cases, your loved ones may not even see your assets if you do not have something planned out in writing. In official form, a life insurance policy is a contract between you and an insurer in which the insurer guarantees payment of a death benefit to named beneficiaries when the insured dies. The insurance company promises a death benefit in exchange for premiums paid by the policyholder.
As a basic principle of financial planning, it is advisable to buy the life insurance policy that is right for you to help you and your family minimize financial stress should the worst happen. Here’s a brief guide to the different types of life insurance policies available in the market.
Term Life Insurance: This is the simplest form of a life insurance plan and is affordable to buy. Term life insurance lasts for a specific amount of time before it expires. In a case where the life of the insured passes away within the time period stated in the policy, the beneficiary will be paid the death benefit by the life insurance company. One should opt for a plan that provides a sum of at least 10 times the annual income, plus the home loan amount, expenses, and other liabilities. In the absence or disability of the policyholder-cum-borrower, this will help in waiving off the beneficiary’s financial liability towards the home loan and other expenses.
Whole Life Insurance: This plan, on the other hand, is a permanent form of life insurance, as it does not expire as long as you pay the premiums. It has a death benefit but also a cash value which accrues interest at a predetermined fixed rate and grows over time. With this cash value, you could borrow funds or even cash out for unplanned expenses such as home repair or temporary unemployment. Because of the cash value feature, premiums of whole life insurance are higher as compared to term plans.
Universal Life Insurance: Similar to whole life insurance, this one also falls into the category of permanent life insurance with a cash value feature. Though similar in some respects, whole life and universal life insurance have some key differences. Universal life is an adjustable form of life insurance due to the flexibility it offers in terms of premiums and death benefits. This allows the person insured to reduce or increase the death benefit and pay premiums at any time in any amount (subject to certain limits). Premiums of universal life insurance are generally higher but it’s more appealing to the customer because of its added flexibility feature.
Key Note: Each policy is unique to the insurance company and the person insured. It’s important to understand what risks your policy covers, how much it will pay your beneficiaries, and under what circumstances.