Life insurance is one of those things that people never seem to completely agree on--why someone would need it, or why it would be a total waste of money that can be used for something else. Some would say it’s an ‘investment’ because your money does grow over time, but investors would probably say it’s not because if you’re looking for investment, there are other venues that would earn you more money in the long term. Like many other things we have to purchase, we go through a process before we make any decision. For example, is it a ‘need’, or a ‘want’? If it’s a need, can I afford it now? If not, what can I do to be able to afford it as soon as possible? If it’s a ‘want’ and I can’t afford it, do I let it go or do I save up for it? But before we get to this stage of decision making, there is a very important stage we need to go through, which is getting the details and getting our facts straight about that which we want to purchase.
And when it comes to life insurance, there are a few things you need to know for yourself before you can honestly say whether you need one or not, so that when the time comes, you can tell yourself that you made the right decision. After all, the keyword in this product is life. What’s at stake here are lives--yours and your loved ones--and your future and theirs.
Let us go ahead and talk about the most important questions one might ask in order to arrive at a reasonable decision.
Who is life insurance for?
The most basic question is, who needs life insurance? And the most basic answer to this is ‘whoever has other people depending on them financially’ and ‘whoever needs or wants to have cash available to take care of final expenses’ in the event of death. To put things in better perspective, here are some of the most common reasons others have purchased life insurance:
More often than not, we rely on a steady flow of income for our daily needs. And for those who have other people depending on them for financial support, what happens when the income-earner is suddenly diagnosed with a terminal illness, becomes permanently disabled, or dies? Who takes care of the bills? Who takes care of the kids’ education? The mortgage payments? These are a few things that people would not want to think about, but this is not being pessimistic. This is called being prepared.
Some people like to be self-sufficient even after they’re gone. The death benefit will help your family cover funeral/burial expenses.
College Education / Wealth Transfer
If you’ve been depositing a few hundred dollars in the bank every now and then to save up for your child’s college education or to simply have something to secure their future or use as an emergency fund in case of sudden death, talking to your financial adviser or an insurance broker can help shed some light on other options. Remember, permanent life insurance has a savings feature and may also an option to have an investment portfolio. At the same time, there are policies that offer twice the amount of the death benefit in case the insured is diagnosed with a terminal illness or dies due to an accident. So, for example, you’ve been putting aside $100 each month for your child’s college education, and after your 9th deposit, you die... your child gets $900. If you put the same $100 into life insurance, depending on your age, the death benefit could be more than $500,000. So, in the same scenario where there is unexpected death after setting aside $100 for 9 months, your child gets $500,000 (or more) for his college education, instead of $900 (plus the minimal interest one gets from a savings account which is somewhere around 0.01% to 2.0% per annum).
Yes, your life insurance provider can help you with estate planning...last will and testament, the bequeathing of assets and all. Now, do you realize the importance of ‘asking’ and getting more information?
Mortgage or Business
When you have properties that still have mortgage payments due, you’d want to be assured that your previous payments won’t go to waste just because nobody can complete the payments if you die. And for couples who can’t yet afford to be both insured, the wiser decision would be to whoever earns more so that in the case of an unexpected death, the loved one left behind isn’t burdened by upcoming mortgage payments. Having to deal with the loss of a loved one is already more than some can handle.
Why do people choose to not purchase life insurance?
If life insurance does seem important or good to have, one might ask, “why do people choose not to purchase life insurance?”
For most people, it is the fear of having an additional ‘expense’ and misconceptions about life insurance in general (i.e., ‘it costs too much’ or ‘I don’t need it… I’m healthy’). For some (or ‘a few’), they just don’t have the need for it. For example, if they are single and have no dependents, and already have money saved to cover final expenses or have money saved that earns enough interest which can replace lost income and take care of medical bills in case of temporary or permanent disability. And some, unfortunately, due to unpleasant experiences with previous insurance agents or companies.
Are all life insurance policies the same?
start with terminologies and the two main types of life insurance. Term Insurance, also known as temporary insurance, provides coverage for a specific number of years from the time you make your first payment--usually from 5 to 30 years. Permanent Insurance, on the other hand, covers you for life or until a certain age (usually 100 years old).
What are the key features of Term Insurance?
Your beneficiary will receive the death benefit or the insured amount if you die during the ‘term’ of the policy.
Generally, you will have the option to convert your term insurance policy to a permanent insurance policy without any need for proof of insurability. This means that you get the option to be insured for life (or until age 100) regardless of your health condition.
It is important to note that a term policy will have no value at the end of the term.
What are the key features of Permanent Insurance?
As long as your payments are up-to-date and your policy is in force, your beneficiary will receive the death benefit regardless of when you pass away.
In addition to the death benefit, the cash value of your policy grows over time because a permanent insurance policy also has a savings feature. It builds cash or loan value which you can withdraw, loan against, or invest (depending on the type of policy you have).
What should I be looking for in a life insurance company?
Setting aside money to secure our future isn’t an easy task. We need to budget wisely, make sure we have enough to cover our daily expenses, and also have enough money set aside that we can expect in the event we die unexpectedly or suffer from a terminal illness or permanent disability which leaves us incapable of working. When we choose to do this through life insurance, it entails entrusting the funds to an entity we do not know personally and this can be difficult. Questions such as ‘how do I know that this company will still be around by the time I die?’ and ‘how can I be sure that the company will pay my beneficiary the death benefit?’ might be the first to come up. And these are most certainly very valid concerns.
But there are certain ‘qualifications’ one might look for when deciding on which company you’d like to go with:
- The financial wellness or financial stability of the company. Big insurance companies will be transparent about their financial statements. Go ahead and check out their net worth, cash flow, revenue for the past 3 or 5 years, and the like. As of 2019, for example, MetLife has 90 million customers with its major market share being in the US. They also have a presence in Europe, Latin America, Asia, and the Middle East. Their net income in 2018 was reported to be at $4.98 billion. And according to BestLifeRates, MetLife, AIG, and Banner Life are among the top 10 life insurance companies in the US.
- The longer they’ve been around, the better. This implies that business has been growing and that they’ve been able to pay out claims.
- Find out how long it takes to get a claim. What good would the death benefit be if it can’t be issued at the time it is needed, right?
What are the most important things I should consider before making a purchase?
- The financial stability of the insurance provider and the products they offer. There are many life insurance companies out there and they may not all have the exact same products. Who you decide to go with should be based on your financial needs.
- Your budget. Whatever policy you decide to purchase, be sure that your premium rate is within your budget. “Within your budget” means that after paying for the premium, you have enough left for daily expenses and some extra for unexpected expenses like medical emergencies or a flat tire. After having computed the face amount that you might require, you might find that the premium is more than you can afford. When this happens, settle for a lower face amount that you can afford. That’s okay. You can then start working on reducing your expenses, or try increasing your income, and then eventually have your policy re-evaluated for a possible increase in the face amount.
When is the best time to purchase life insurance?
A financial adviser might say ‘yesterday’ was the best time, but since we cannot go back in time, then the next best answer would be ‘now’.
And when this advice comes from an insurance agent, you might think, “well, of course, who wouldn’t want a sale ‘now’?” But this advice is not at all unfounded. There are several factors that affect the premium for a life insurance policy--the most important ones being age and health condition. The younger you are, the healthier you are expected to be. Hence, there is less risk. Obviously, when the insured is more at risk of death to illnesses that start showing up as people age, the risk of the insurance company having to pay out a claim also increases; therefore, the higher premium. Note that regardless of your health condition, the rates do go up as you age. So, let’s say you are now 40, and your in perfect health (exactly the same as 15 years ago). Your premium for a life insurance policy with a face amount of $500,000 would still be higher now than it would have been 15 years ago. Plus, if you’re planning on getting a permanent life insurance policy with an investment feature, imagine the amount you lost income opportunity if you wait another 5 years to purchase.
As pointed out, there are several reasons why someone would decide to get a life insurance policy. It may be to replace income in case of disability or perhaps upon retirement. It may be to secure your children’s college education. It may be to ensure final expenses and debts are paid off upon the insured’s death. It may be to finally pay out the remainder of your mortgage after 15 or 20 years or have a lump sum amount to start your dream business. But at the end of the day, it’s all about the peace of mind that whatever happens to the insured, the loved ones left behind won’t have to worry about the financial side of things. It is about knowing that if the time comes that you are no longer in the same capacity to provide for your family, someone’s got your back and that you have secured your family’s financial well-being.
If you're ready to talk about planning for your family, we're more than happy set your mind at ease. Contact us today and we'll help you out!
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