Are you new to buying life insurance? If your answer is Yes, then you need to go through this post.
It’s a post that offers detailed information on everything you need to know about life insurance.
You get to learn how life insurance works and why life insurance is important. Most important of all, you get to know what life insurance is.
And that’s not all.
We have also shed light on various other aspects related to life insurance.
For instance, you come to know how to buy life insurance. So go through this post on life insurance.
Let me start by asking you an important question:
(A rather awkward question indeed)
Do you love your family?
If your answer is “yes” then the next obvious question to you would be how you would ensure the safety and happiness of your family?
Surely you would like to do everything and anything to guarantee the safety, happiness, and peace of mind.
You would work to build up your financial status, make provisions for future plans, aspirations, and responsibilities, provide your children with the best possible education and other amenities and do whatever is possible for you.
But have you given a thought to the scenario when you are not present in the scheme of events or something unfortunate happens to you, you meet with a serious accident, diagnosed with a critical illness or fall prey to a permanent disability?
Then would you be able to provide the same standard of living to your family?
Quite clearly, your answer would be “no.”
In such circumstances, steps in the role of one of the most widely used risk coverage financial instrument (that would protect your family’s financial interests).
It is none other than Life Insurance.
Insurance today has become a key and vital part of personal financial planning.
Your portfolio is incomplete without the input of Life Insurance.
It is a financial instrument that serves to provide you with savings and security. It covers risks such as death, critical illness, accident, permanent or partial disability and serves as an instrument for long-term care as well.
- 1 What is Life Insurance?
- 1.1 Term Insurance
- 1.2 Universal Life Insurance
- 1.3 Whole Life Insurance
- 1.4 How is Life Insurance Premium Determined?
- 1.5 How Life Insurance Works?
- 1.6 What Does Life Insurance Cover?
- 1.7 Why is Life Insurance Important?
- 1.8 10 Reasons Why You Need Life Insurance
- 1.8.1 1. Life Insurance provides Risk Cover
- 1.8.2 2. Life Insurance serves to fulfill various Life Stage needs
- 1.8.3 3. Life Insurance as a Medium for Meeting Rising Health Expenses
- 1.8.4 4. Life Insurance provides Assured Returns
- 1.8.5 5. Life Insurance can be easily Liquidated
- 1.8.6 6. Life Insurance serves to build the habit of saving
- 1.8.7 7. Life Insurance gives the facility of taking Loans
- 1.8.8 8. Life Insurance offers Tax Benefits
- 1.8.9 9. Life Insurance offers a level Payment Structure
- 1.8.10 10. Life Insurance gives Peace of Mind
- 1.9 How Much Life Insurance Do I Need?
- 1.10 How to Buy Life Insurance?
What is Life Insurance?
Life insurance is a contract that happens between an insurance company (known as insurer) and a policyholder (insured).
Herein, the insured or the policyholder makes premium payments to the insurance company (at regular intervals), and the insurance company makes a lump-sum payment, known as a death benefit, to the beneficiaries upon the death of the insured person.
The death benefit offered by the insurance company is in consideration of the payment of premium made by the insured. So, the purpose of life insurance is to provide financial protection to the surviving dependents upon the death of the insured.
It is necessary that when you apply for life insurance, you first go on and analyze your financial situation to determine the standard of living needed for your surviving dependents.
In fact, there are insurance agents or brokers that can help you in accessing your life insurance needs and can establish the type of life insurance that is most suitable to address those needs.
There are various life insurance instruments or channels that are available nowadays to meet your life insurance needs.
- Whole life
- Term life
- Universal life
- VUL (Variable Universal Life) Policies
Moreover, it is important for you that you re-evaluate your life insurance needs annually or after major life events such as marriage, the birth of a child, and major purchases, such as a house.
Typically, you should choose life insurance based on your needs and financial goals.
For example, Term insurance protects for a set period whereas permanent insurance, such as whole and universal life, offers lifetime coverage.
We want to brief you that the death benefits from all forms of life insurance are generally income-tax-free (In India).
As we have briefed above:
There are various types of life insurance.
Here, we discuss some of the common types of life insurance:
Term life insurance is made to offer financial protection for a specific period, say 10 or 20 years.
With traditional term insurance policies, the premium amount stays the same for the coverage period you select.
After the term period, the policies may offer continued coverage but at a substantially higher premium payment rate.
Moreover, term insurance is mostly less expensive than permanent life insurance.
Usually, term insurance covers the lost potential income during working years. So, term insurance proves as a safety net for your beneficiaries.
It ensures that your family can meet their financial goals (paying for college, running a business, paying off a mortgage) in case of your sudden demise.
The term insurance benefits are paid in a lump sum and not in regular payments like paychecks.
Universal Life Insurance
The Universal life insurance is like permanent life insurance. It offers lifetime coverage to the insured.
Moreover, Universal life insurance policies are flexible.
It allows you to raise or lower your premium payment or coverage amounts throughout your lifetime.
Typically, premium payments for universal life are higher than term insurance.
Usually, universal life insurance is used as a flexible estate planning strategy where the insured uses it for transferring wealth to the beneficiaries.
It is also used as a long-term income replacement, wherein the need extends beyond working years. Universal life insurance provides death benefit coverage as well as builds on cash value.
Whole Life Insurance
Whole life insurance is again a type of permanent life insurance which offers lifetime coverage. As it has lifetime coverage, the premium payments are higher than term life.
The premium payments in whole life insurance are typically fixed. Whole life also offers cash value which functions as a savings component and accumulates tax-deferred (over time).
Whole life is primarily used as an estate planning tool for preserving and transferring wealth to your beneficiaries.
How is Life Insurance Premium Determined?
Typically, Insurers use rate classes that are termed as risk-related categories for determining your premium payments. That said these categories don’t affect the length or amount of coverage.
The rate class takes into consideration some factors.
- Your overall health
- Family medical history
- Your lifestyle
For example, tobacco use increases risk. So, the premium amount for someone who consumes tobacco would be higher than the one who does not use tobacco.
How Life Insurance Works?
A life insurance policy consists of three major components.
1. Death Benefit
It is the amount of money guaranteed by the insurance company to the beneficiaries in case of death of the insured. The insured can choose their desired death benefit amount which is based on estimated future needs of surviving heirs.
However, the insured has to qualify the insurance company’s underwriting requirements. Plus, the insurance company ascertains the insurable interest.
Premium is the amount that the insured needs to pay to the insurance company when he/she takes an insurance policy.
The premium amount is determined using actuarially based statistics. The insurer ascertains the cost of insurance (COI). The premium covers mortality costs, administrative fees, and other policy maintenance fees.
Plus, various other factors determine the premium amount. For example, the age of the insured, medical history, occupational hazards, as well as personal risk propensity. The insurer is bounded to pay the death benefit if premiums are submitted as required.
For example, with term insurance policies, the premium amount covers the cost of insurance. For universal policies, the premium amount includes the cost of insurance (COI) as well as a cash value amount.
3. Cash Value
Cash value is related to universal or permanent life insurance policies. Typically, cash value serves two purposes. It is a savings account in which the cash is accumulated on a tax-deferred basis. However, some policies do have some restrictions on withdrawals. Its second purpose is to offset the rising cost.
Riders in Life Insurance Policies
Riders are an important aspect of life insurance policies.
These are the options provided to the policyholders that allow them to customize their policies and accommodate their personal needs.
So, Riders allow policyholders to modify their plan. However, their availability depends on the provider.
For example, accidental death benefit rider offers additional life insurance coverage in case the insured death happens from the accident.
There’s the waiver of premium rider that ensures the waiving of premiums in case the policyholder becomes disabled and unable to work.
There’s also the disability income rider that pays a monthly income in case the policyholder becomes disabled.
The ADB (accelerated death benefit) rider allows the insured to collect a portion or all of the death benefit in the event of diagnosis of a terminal illness.
Each insurance policy is unique to the insured and insurer.
What Does Life Insurance Cover?
Life insurance is taken to protect your family financially in case you were no longer around.
Insurance turns out to be an indispensable financial instrument when you have a spouse, children, a mortgage, and other debts.
It’s an affordable and necessary product which helps to create stability no matter what life sends your way.
Usually, people buy life insurance to cover mortgage expenses, college tuition for the children, any shared debt, planning your retirement, and to protect your family financially in case of your sudden demise.
Here, we list out the most common expenses which life insurance covers:
- End-of-life expenses – it covers the cost of a funeral
- Day-to-day bills – life insurance helps your partner with everyday expenses when you are no longer around. It helps to meet ongoing financial obligations
- The mortgage – A insurance policy helps your partner to pay for the mortgage when you are no longer present
- Consigned debts – Debts can come in the form of car loans, mortgage debt, student loans, or even simple lines of credit. The life insurance can help your loved ones to pay off debts after you’re gone
- Child care expenses – life insurance can protect your growing family and their dreams. A life insurance cover ensures financial security and stability to your family
- Leaving a legacy – With a life insurance cover, you can make things easier for your partner and children
Why is Life Insurance Important?
First, we take up an example to show you the importance of life insurance after that we list out as much as ten reasons why you need life insurance.
We begin with the example:
Suppose that Mr. X is leading a good lifestyle. He has a family to look after and is running a successful enterprise.
And suddenly he met with an accident. In spite of the best efforts, the doctors could not save his life.
Now, what will happen to his family, his loved ones?
He had a business and a legacy too. At this stage, you need the helping hand of life insurance.
Mr. X was aware of his responsibilities and had made the right decision of insuring himself.
He had taken Life Insurance.
The Life Insurance Cover that Mr. X had taken will now provide the much needed financial support to the surviving dependents of Mr. X and cover their future living costs and other financial needs.
Mrs. X would now be able to lead and maintain the living standard which she and her children were living during the times when Mr. X was alive.
She can now fulfill her responsibilities towards her children and continue to provide them with a good education. Mrs. X could also pay off any debts left over by his husband. She can save the money paid by the life insurance for future planning and other necessities.
No Life insurance can bring back the person to live but provides the much needed financial protection in various ways to the family and thus can in a sense lessen the uncertainties of life.
Life Insurance has an up face also, meaning that it also helps to better plan your life for a happy future.
With Life Insurance you can save intelligently without taking any risk of losing your hard earned money. Insurance guarantees a steady stream of monthly income as long as you are alive.
If you save your retirement savings through life insurance, you can guarantee yourself a secured, happy and financially independent life after retirement.
10 Reasons Why You Need Life Insurance
If you are still not convinced to buy life insurance, here are some reasons why you need life insurance.
1. Life Insurance provides Risk Cover
Life is always associated with uncertainties and risks. By having life insurance, you ensure and protect the future well being of your family in case any unforeseen event happens with you. It provides financial support to your family in the event of your untimely death.
2. Life Insurance serves to fulfill various Life Stage needs
With life come responsibilities and aspirations. And Life Insurance serves as an effective source of long-term investment to fulfill various life stage needs.
It may be your children’s education, their marriage, a quality family life, building your dream home, for a happy retired life, etc. Life Insurance can be an effective medium to fulfill all of your aspirations and responsibilities.
3. Life Insurance as a Medium for Meeting Rising Health Expenses
Life Insurance incorporates an integral and important element in the form of “Riders” by which you can cover up the health expenses if you are diagnosed with a critical illness or require meeting hospitalization expenses. Riders can be attached to your insurance policy at a little extra cost, and effectively meet the various medical costs.
4. Life Insurance provides Assured Returns
Most of the Life Insurance Plans, other than Unit or Market Linked Plans provides an opportunity to get assured and guaranteed returns. Monetary benefits are prefixed in the event of death and as well as at the time of maturity of the insurance plan.
So, you exactly know how much risk you have covered from a particular life insurance policy that you have taken. It enables better financial planning for your future requirements.
5. Life Insurance can be easily Liquidated
Life Insurance Policies can nowadays be easily liquidated or cashed so that you or your family has the money when they need it the most. The claim procedures have been automated and streamlined to give better customer satisfaction.
6. Life Insurance serves to build the habit of saving
As to continue an Insurance plan you mostly need to pay regular payments termed as “premium.” If you fail to pay the premium of your policy, the risk cover ceases to continue.
So, by default, you have to pay the premium of your life insurance policy. This, in turn, serves to inculcate the habit of savings. Most of us do not like to save or nearly forget to save. Through Insurance, you can learn to save for your future.
7. Life Insurance gives the facility of taking Loans
Some Life Insurance policies come with the facility to take loans against the policy. So you have a dual benefit, on one side your life insurance continues, and on the other side, you can easily have the required amount against your very own policy. No need to take expensive Bank Loans.
8. Life Insurance offers Tax Benefits
Most of the Insurance plans offer attractive tax benefits both when you take up a life insurance policy and also when the monetary benefits are paid to you.
9. Life Insurance offers a level Payment Structure
The premium amount for an insurance policy is fixed and does not change or go up with time no matter how old you get. So life insurance has a level payment structure. You know your financial commitments beforehand and can plan for the payment of premiums as part of your regular budget.
10. Life Insurance gives Peace of Mind
And finally, Life Insurance gives you a sense of security and complete peace of mind. You know that you are saving for your future and that your family is protected from any unforeseen and unfortunate event and also from uncertainties of life.
Thus we see that there are numerous benefits of having Life Insurance. The reasons highlighted above clearly bring forth the importance of Life Insurance to us.
Life Insurance effectively serves to reduce the risks associated with our lives.
As explained above, the Ten Reasons Why You Need Life Insurance can be a guiding source for you to know that having life insurance is important and necessary for yourself and as well as to protect the future of your family.
How Much Life Insurance Do I Need?
This is a variable amount and varies from person to person, but the parameters on which this is based are common to all the people who plan to have a life insurance cover.
It is quite obvious to understand that two persons with the same salaries but with different liabilities would need different life insurance cover.
So, let us understand the factors contributing to deciding the life insurance cover needed by you.
A systematic approach is needed for figuring out your life insurance cover.
The very purpose of taking a insurance cover is that you want your family to maintain the same standard of living even when you are not alive.
So, as a first step in deciding the figure for insurance cover, you ought to decide the number of years for which you want to have life insurance coverage. As a simple strategy, you can have the risks covered for your life at least up to the age of 55 years.
This is the period when you have to shoulder the maximum of your responsibilities. So, the risk is highest in this period.
For example, you have to meet various expenses related to your children education, their marriage, homeownership, parenthood, loans, debts and other expenses as well. You have to cover all of these with your life insurance coverage.
Generally, a life insurance cover of 25 years would be adequate.
Secondly, you have to decide on the type of insurance coverage.
This is important as you want to have maximum coverage with the least expense.
Term insurance would work perfectly to fulfill your needs of life insurance cover. The advantage term insurance gives to you is that it provides maximum coverage with the least payment.
Thirdly you have to decide the exact amount of life insurance cover.
Now, this would vary from person to person, but according to a well-accepted formula, this amount can be calculated by considering a couple of factors.
One is the amount of your present annual income, the other one is the inflation rate, and the last one is the number of years you want the life cover.
So, if your annual earnings are $10000, the inflation rate is 10% per annum and period of insurance is 20 years, then you should at least take insurance cover of $200000.
You should remember that this figure is a minimum one and is also not constant throughout insurance.
This means that you might have to add to this figure as and when your earnings increase, your responsibilities, and liabilities change and also according to the change in the inflation rate.
So, this is how you can arrive at the figure of How Much Life Insurance Cover Do You Need?
Having said this, it is not mandatory to have the required insurance cover at one go.
You should first analyze your present financial situation and can gradually increase the life insurance cover. The amount you keep aside for your insurance cover should never hamper your day to day expenses.
So, you can decide upon the amount of life insurance cover based on your present financial commitments and family responsibilities. But you ought to have life insurance cover in place so that your family is always protected and assured of a safe and sound future.
Thus, we see that Life Insurance Cover need is dependent on your desire to provide your family with a decent standard of living even after your death.
So, ultimately the financial security and well being of your family is in your hands.
If you want to give your family financial protection even after ten years of your death, you must have life cover for that much amount which your family needs in the next ten years.
If you want your family to maintain the same standard of living then taking life insurance becomes utmost important.
How to Buy Life Insurance?
We have arrived at the final frontier.
Now, you need to decide the appropriate coverage amount and buy the actual life insurance policy.
Nowadays, it has become simple to buy an insurance policy.
You can take the help of online life insurance calculator that considers all your requirements and gives you a personalized recommendation for your coverage.
Once you know the amount of coverage, you can go ahead and purchase a policy of life insurance.
The easiest way to purchase a policy is to do it online and from any device.
However, before you make the purchase, you need to read and understand the terms and conditions listed in the policy document. That way you assure that you get the right policy for yourself.
Another very easy and age-old method of purchasing an insurance policy is to get in touch with a life insurance agent or broker.
You can contact (send a message) the insurance company and ask them that you want to discuss your life insurance needs with one of your agents or brokers.
They will do the needful.
In case, you have some prior relations with any life insurance agent; you can contact them as well.
The agent will guide you through the whole process. They can assist you with the right policy, the amount of coverage, the term period, and so on.
You can also file your application through the agent.
Once your application is approved, you need to pay at appropriate intervals to enjoy the benefits listed in your life insurance policy.
It’s simple as that.
Lastly, remember to pay your premium on time failing which your policy benefits cease to exist.
So, we see that life insurance is one such financial instrument that can offer you complete peace of mind.
With a life insurance plan, you can very well safeguard the financial security of your family.
Finally, it’s your call, and you have to decide to buy a life insurance cover or not.
We have offered you with nearly all the information that you need to appreciate the importance of life insurance cover.
If you love your family, you cannot ignore life insurance for sure.
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