A life insurance policy forms one of the most crucial aspects of your personal finance. Yet, there is a level of skepticism and doubt attached to its need and applicability in a person’s life. Of course, life insurance offers risk coverage and takes care of your family’s financial needs in the unfortunate event of your death.
But, the truth is that there is more to it than meeting your family’s monetary requirements in your absence. It is one of the finest tools for the long-term growth of your investments. A life insurance policy can help you save for a range of needs, from the future educational expenses of your child to your retirement costs.
Thus, it is better to have a basic idea about it before you sign up for a policy. Here are the five crucial things that you need to know about life insurance. Start reading to know more!
The Right Time to Get Life Insurance
Having an idea of a policy is not enough; you also need to purchase it at the right time. You might not need to go for a life insurance policy where you are single with no dependents. Most employers offer a small policy that is enough to cover the basic expenses. This policy is enough for someone with no dependents.
However, you will have to consider getting insurance after you get married and have children. Similarly, you might need to have a life insurance policy upon assuming the guardianship of your sisters, brothers, or any other dependent. Keep in mind that the main aim of a life insurance policy is to financially take care of your dependents in the event of your demise.
The Key Roles in a Life Insurance Policy
There are four major roles in each life insurance policy, and they are:
- Insurance company: The insurance policy, also called the insurer, offers the policy and has the responsibility to pay out if their liability gets triggered.
- Owner: The owner is the person who owns the life insurance policy. If a wife purchases life insurance for her husband, she becomes the policy owner and vice versa.
- Insured: The insured is the one against who the policy has been taken. Consider the example mentioned above: the husband will be insured in this case. The owner and the person insured can be the same, as well.
- Beneficiary: A nominee or beneficiary is an individual(s) who will get a payout if the insured comes to pass. It is mandatory to list out beneficiaries while buying an insurance policy.
Different Types of Life Insurance Policies
There are two main kinds of life insurance policies, and each comes with its benefits.
- Term life insurance: Term insurance policies are purchased for a particular number of years. The interest rates are lower compared to whole life insurance. It can be purchased at different amounts for a set timeframe. People usually get term life insurance for five, ten, or twenty years. After the end of the term, you can either take out a new policy or self-insure. Term insurance can be a choice if you want an affordable option.
- Whole life insurance: Whole life insurance is the cash value policy that is purchased and kept for the rest of your life. It is more expensive in comparison to the term insurance because you need to pay a premium for it. The benefits of this policy are that you get lifelong coverage, tax rebates, and a constant premium. In this regard, for people aged 50 years and above the best life insurance is colonial Penn. It provides a whole life policy cover including your burial expenses.
Choosing the Right Insurance Amount
The amount of insurance you need depends on your financial situation and living conditions.
As mentioned earlier, the insurance amount provided by your employer is enough if you have no financial dependents. The amount of insurance purchased has to increase when you are married or have other dependents.
The simple rule of thumb to keep in mind here is that the amount of insurance purchased should be enough to let the dependents live off the interests of the payout. Start by determining the annual costs of living for your family, and then figure out the amount of insurance you need to buy.
If you have any mortgage, debts, or pending loans, then don’t forget to factor that in as well, when figuring out the right insurance amount. A significant factor to remember here is that life situations change, but life insurance also has to change in tandem. You should use the term policies to adjust the insurance amount if needed.
The Right Age of an Insurance Applicant
The rate or annual premium of a life insurance policy is set at the time of buying and remains the same for the entire duration. This premium amount increases considerably for every year of your age. There is simple math behind this factor. Every year puts you one step closer to life expectancy, which makes the policy more costly.
An applicant’s age has to be between 18 and 65 years to purchase a life insurance policy. You would not even be allowed to purchase an insurance policy after a certain age. The risk of payout increases when an individual is over the age of 65 buys a policy.
Insurance companies also tend to ask for a complete medical report before offering their policy to a prospective buyer. The same logic of reducing the chances of having a payout applies in this case.
Besides providing financial protection, a life insurance policy saves you from paying hefty taxes, and you can also take a loan against it during emergencies. It also provides a claim settlement amount along with the maturity benefits of the policy. It is time for you to sign up for a policy of your own without further delay. Talk to a well-reputed insurance provider and look into their plans. Choose the plan that suits your present financial condition and future monetary needs.