Tuesday, June 18, 2024

Life insurance decisions: the key questions to ask

When we see ads today, there’s a good chance that we’ll come across one promoting life insurance. No matter what stage of life you are in, it can be a useful safety next if you passed away unexpectedly. But it’s never just a case of buying a policy and hoping everything sorts itself out. There are a number of aspects you need to consider first.

What is life insurance?

In short, life insurance is a type of financial protection that provides a sum of money to the beneficiaries of the insured upon their death. This can help provide financial security to loved ones in the event of the insured’s passing.

It can be an important financial tool for anyone with dependents or larger financial obligations, as it can provide a source of income. It can help cover expenses such as mortgage payments, college education costs, and everyday living expenses.

Without it, you run the risk of leaving loved ones with financial burdens and uncertainty after your passing. There it’s a natural part of financial planning for many families.

If you’re about to buy a policy, there are several questions you should ask yourself before you go further:

Photo by Vlad Deep on Unsplash
Photo by Vlad Deep on Unsplash

What type of life insurance policy do you need?

Usually the first port of call. There are different types of life insurance policies, term life insurance and whole life insurance, are the main two.

Term life insurance

Term life insurance provides cover for a specific period of time known as the policy term. This could be 5 years or it could be 30. It all depends on how long you wish to have protection. Once the policy reaches the end of the term, your cover will expire.

This means if you pass away after this time, your loved ones will not receive a payout. However, if you pass away during the term, the policy will pay out.

There are specific levels of term cover, such as level term, where the payout value and cost of monthly premiums stay fixed throughout the policy term.

Whole life insurance

Whole life insurance, on the other hand, provides cover for your entire life. Unlike term cover, the policy won’t expire unless you stop paying your premiums. So as long as you keep on top of your premiums, you’ll remain covered.

The main selling point of this type of policy is that it provides permanent cover, which provides much-needed peace of mind for families. But because of this, premiums tend to be higher compared to term life insurance.

When choosing between the two, it ultimately comes down to time. If you want a long-term policy in place and don’t mind paying more for premiums, then whole life insurance is a no-brainer. Or if you want cover for a certain amount of time or want a cheaper alternative, then term life cover is a solid choice.

How long will I need cover for?

This mainly applies to term life insurance. Consider how long you want to be covered for and what your financial obligations are. For example, if you have young children, you may want a policy that covers them until they are financially independent. Or if you have a mortgage that will be paid off in 20 years, you may only need cover for that period of time.

How much cover do you need?

When determining how much cover you need, you’ll want to think about your financial obligations as well as the needs of your loved ones. A common rule of thumb is to aim for coverage that is at least 10 times your annual income. This can help ensure that your family will have enough financial support to maintain their lifestyle in the event of your passing.

Consider factors such as:

  • Everyday living costs like shopping, utilities, and other day-to-day expenses
  • Mortgage or rent payments
  • Outstanding debts such as credit cards or loans
  • Future expenses like college tuition for children
  • Funeral and burial costs
  • Education costs for your children

If you’re opting for term cover, you may want a specific policy like decreasing term life insurance. This is usually taken out alongside a mortgage to ensure that the payout is lowered over time, in line with your balance as you make repayments.

What is the cost of the policy?

It’s only natural to be cautious of the cost of your policy. Premiums can vary depending on factors such as your age, health, lifestyle, and the type and amount of coverage you choose.

When comparing policies, be sure to get quotes from multiple insurers to ensure you’re getting the best deal. Keep in mind that while life insurance tends to have lower premiums initially, they can increase as you get older.

Insurers will typically ask for medical info and may even require a medical exam before offering you cover. This is to assess the level of risk you pose to the insurer. Make sure to be honest about what you provide as false information could result in your policy being voided.

If you’re in good shape, you shouldn’t expect premiums to be too high. But if you have pre-existing health conditions or smoke, then your premiums could be higher as a result.

What are the policy exclusions and limitations?

Every insurer will have exclusions and limitations on their policies, what you need to do is review these carefully beforehand. This might be certain types of death, such as, death as a result of illegal activities, or death due to pre-existing health conditions that were not disclosed. On top of this, the payout amount, it could have limitations or a timeframe for when the policy will pay out.

Once you’re happy you know everything you need to know, you can confidently choose the life insurance policy that best suits your needs. Remember, it’s always a good idea to review your policy regularly to ensure it still meets your requirements as your circumstances change over time.


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